Final Results

4 March 2015

SQS Software Quality Systems AG

("SQS" or the "Company")

Results for the year ended 31 December 2014

SQS Software Quality Systems AG (AIM: SQS.L), the world's largest specialist supplier of software quality services, today announces its audited results for the 12 months ended 31 December 2014 (the "period").

Financial Highlights:

· Total revenue increased by 19% to €268.5m (FY 2013: €225.8m)

· Adjusted* gross margin up to 33.4% (FY 2013: 32.0%)

· Adjusted** PBT increased by 52% to €18.8m (FY 2013: €12.4m)

· Adjusted*** EPS increased by 43% to €0.43 (FY 2013: €0.30)

· Operating cashflow improved to €26.6m (FY 2013: €22.8m)

· Net cash as of 31 December 2014 of €9.8m (FY 2013: net debt €2.9m)

· Proposed dividend of €0.13 per share (FY 2013: €0.09 per share)

* adjusted to add back €2.0m of IFRS amortisation of order backlog from SQS India BFSI acquisition

** adjusted to add back effect under * and €5.4m of IFRS amortisation of client relationship assets from SQS India BFSI acquisition, €0.6m of non-recurring severance costs for the SQS India BFSI founders and €0.2m acquisition costs for SQS India BFSI, €0.4m of pro forma IFRS forex adjustments of SQS India BFSI acquisition value, €0.1m pro forma interests on pensions

*** adjusted to add back effects under ** at actual local GAAP tax rate of 26%, less €0.8m on minority interests

Operational Highlights:

· Managed Services revenue increased 32% to €120.5m (FY 2013: €91.1m)

· Managed Services represented 45% of total revenue (FY 2013: 41%): our largest business line

· Managed Services gross margin improved by 260 basis points to 36.8% (FY 2013: 34.2%) as a result of an improved global delivery mix

· Improving revenue visibility with Managed Services order intake up 26% to €142m (FY 2013: €112.5m)

· Average revenue per client increased by 34% as a result of continuing strategic focus on larger client engagements

· Offshore/nearshore test centre billable headcount increased to 60% of total (FY 2013: 47%)

· US revenue continued to grow by 105% to €12.3m accounting for 5% of total revenue (FY 2013: 3%)

· Acquired majority stake in Thinksoft Global Services ("Thinksoft"), which has now been fully integrated and renamed to SQS India BFSI

Post Period Events

· Acquisition of majority stake of Bit Media S.p.A for a total cash consideration of €6.1m, strengthening the Company's European footprint and customer base providing further cross-selling capabilities

Diederik Vos, Chief Executive Officer of SQS, commented:

"We are delighted to have again delivered on all our key performance indicators during the period. It is particularly pleasing to report further revenue growth from more complex, higher margin Managed Services contracts for our larger clients. Operating margins are up and we finished the year with net cash on the balance sheet.

"The Company is now serving larger contracts across our global client base and we expect the trend to continue. Our global industrialised delivery model lends itself well to scalability and strong cash generation. We have achieved a major step forward in the development and application of re-usable assets. This strengthens our global delivery capacity, supports organic growth and facilitates the rapid and effective integration of acquisitions.

"We foresee a number of exciting growth opportunities, particularly in the US, and plan to further diversify our geographic revenue split. The Board looks forward to the current year with cautious optimism."

Enquiries:

About SQS Software Quality Systems

SQS is the world's leading specialist in software quality. 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 4,100 staff. SQS has offices in Germany, the UK, Australia, Egypt, Finland, France, India, Ireland, Italy, Malaysia, the Netherlands, Norway, Austria, Singapore, Sweden, Switzerland, South Africa, the UAE and the US. In addition, SQS maintains a minority stake in a company in Portugal. In 2014, SQS has generated revenues of €268.5million.

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 8,000 completed projects under its belt, SQS has a strong client base, including half of the DAX 30, nearly a third of the STOXX 50 and 20 per cent of the FTSE 100 companies. These include, among others, Allianz, Beazley, BP, Centrica, Commerzbank, Daimler, Deutsche Post, Generali, JP Morgan, Meteor, Reuters, UBS and Volkswagen as well as other companies from the six key industries on which SQS is focussed. For more information, see www.sqs.com.

Chief Executive's Statement

Introduction

The 12 month period under review has been a period of significant progress. The Company continued to build on the positive momentum achieved during the first half on the back of the Company's ability to engage in longer term relationships with clients while adding higher-value contracts with existing and new clients.

The combination of organic and acquisitive growth enabled us to further cement our position as the world's leading specialist in software quality services. Our growing geographic reach, proven track record and continued investment helped us to further develop our core offering, increase revenue and generate strong operating cash inflow to finish the period with a strengthened balance sheet.

Managed Services ("MS") remains one of our key growth drivers and now accounts for 45% of total revenue versus 41% for 2013. The high value contracts entered into in MS and the growing, yet still small share of automation of our MS operations underpins the Company's strong financial performance with higher gross margins delivering significant operational gearing across the Company. Gross margins increased 260 basis points to 36.8% during the period. The MS division currently has an order backlog of €129m, up 18% from €109m 12 months ago.

The proportion of billable staff delivering services from our offshore and near shore centres has continued to increase in line with our strategy to 60% of total versus 47% for the prior period, representing the key driver of the Group's gross margin improvement by 140 basis points. In addition, the strategy to engage in higher value assignments was also successful with average revenue per client increasing 34% to €634k.

Given the nature of our strategy to drive the MS business and focus on larger client engagements, revenue from Specialist Consultancy Services ("SCS"), Regular Testing Services ("RTS") and other revenue sources increased by 9.8% over the period, which was below the average rate for the Group.

Whilst we achieved organic revenue growth across Europe, this growth was somewhat limited by the challenging geopolitical environment. Notwithstanding these headwinds, the Company increased market share in Europe with Germany remaining its largest European market. Europe represented approximately 91% of total revenue during the period (FY 2013: 95%).

The Company also continued to build its client base and revenue streams in the US. For the period under review, revenue from the US more than doubled and accounted for 5% of total revenue post the acquisition of Thinksoft.

In terms of market verticals, Banking, Financial Services and Insurance ("BFSI"), now accounts for more than 54% of group revenue and was once again our largest and strongest market segment.

Total revenue, therefore increased 19% to €268.5m during the period with a full 12 months contribution of €26.0m from the acquisition of Thinksoft. Organic revenue growth for the period was 7.4% to €242.5m. Adjusted gross profit margin increased 140 basis points to 33.4%, due to the increased contribution from Managed Services and an improved global delivery mix with a higher test centre share. The growth in adjusted gross profit and adjusted profit before tax of 23.8% and 52.1% respectively on revenue growth of 19% illustrates the operational gearing the Company can generate.

At the period end, debtor days stood at 72 versus 82 at the end of the first half and 64 at the end of the previous year. This is in line with our expectations and reflects the typical seasonality of our business. Net cash at the period end was €9.8m following strong cash conversion of 103% of adjusted EBITDA, despite continued investments of €1.7m to extend the test centre building in Pune, India, and €1.8m in acquiring further shares in SQS India BFSI.

In summary, by focusing on providing an enhanced value proposition within the global testing landscape we achieved significant growth as the leading specialist service provider in one of the biggest and fastest growing segments of the IT industry. We have now established a credible footprint in the US, which is the largest market for software testing services globally and are therefore pleased with the progress the Company has made during 2014.

New Business

During the period we signed a two year extension with a global, European headquartered bank worth more than €30m, an MS contract extension worth €15m with a major European telecommunications provider and a new MS contract with a major European bank worth an initial €10m.

Notably, we also added a number of new contracts outside BFSI with major US car and car part producers. This was key as part of our stated strategy of diversifying geographic revenue so that the Company becomes less reliant on traditional European market segments.

Given our focus on larger contracts, we aimed to maintain our client base between 350 and 450 and finished the year with 423 clients.

Market & Industry Overview

A recent report, published by industry analysts Nelson Hall in 2014, highlighted that software testing continued to outperform the overall IT services market in Europe. Furthermore, Nelson Hall also upgraded their growth expectations for software testing services across Europe in 2014 to 9% from 7% in 2013.

The updated 2014 Nelson Hall report also estimated 'Testing Services' (testing services provided by organisations such as SQS in standalone contracts) would increase each year to 2018 against a fall of 3% per annum for 'Traditional Testing Services' (services bundled within a development contract). This is attributed to the fact that Specialist Testing Services are perceived by clients as providing faster execution at reduced cost, and confirms that SQS is firmly positioned in the fastest growing segment of the market.

The 2014 Nelson Hall report continued to further support SQS's strategic focus by highlighting that expected growth was most pronounced in a number of our key sectors. These included retail and logistics (driven by m-commerce and e-commerce) with 10% growth, energy and utilities (driven by deregulation) with 12% growth and financial services (driven by regulatory compliance) with 19% growth. This also adds weight to the rationale behind the acquisition of SQS India BFSI which complements our capabilities within the BFSI market segment.

The results of the report also supported the Managed Services strategy in revealing that 57% of decisions to purchase software testing services are likely to be made by 'efficiency seeking clients' and that there was a growing momentum towards larger multi-year contracts. Managed Services contracts are designed to deliver efficiency and are typically significantly larger in size than Regular Testing Services contracts.

Acquisitions

The acquisition of the majority stake of 53.35% of Thinksoft at the beginning of 2014, now renamed SQS India BFSI, has enabled the Company to increase its global scale and offshore delivery capabilities and has provided a presence in new geographies including Australia, Singapore and the Middle East while crucially strengthening our position in existing markets including the US. 

Post the year end, the Company also acquired 90% of the issued share capital of Bit Media S.p.A ("Bit Media"), a testing services and systems analysis provider to the financial services and public sectors, headquartered in Italy, for a cash consideration of €6.1 million. As a result, the Company expects to benefit from a significant presence in all of the major European economies, increasing its cross selling opportunities. Bit Media has a three-year order backlog and is especially well represented within the BFSI sector - one of the Company's existing key verticals. As with SQS India BFSI we expect to benefit from a number of operational synergies as we further grow our sales base and physical presence.

The Company continues to seek complementary acquisitions in large and growing markets, such as the US, in order to provide additional growth opportunities whilst further diversifying revenue.

Strategy

We have maintained our focus on extending the Managed Services share of our business and on a global delivery model by further increasing the share of revenue to be delivered from offshore and nearshore test centres. We continue to build out our business through organic growth and further acquisitions.

Our three primary service offerings remain Managed Services to meet the demand of clients seeking efficiency, Specialist Consultancy Services to meet the demand of clients seeking transformation and quality and Regular Testing Services ("RTS") to meet the demand of more price conscious clients, who tend to be served on a local basis.

We have had considerable success in growing our Managed Services business during the period. Our aim is to continue to grow this part of the business as a proportion of total revenues to 50% by the end of next year.

We have continued to be proactive in seeking to improve the margins achievable from our RTS business during the period. This has involved careful targeting of new contracts that are likely to provide greater future value, with a minimum potential value of €1.5m. In addition, we have sought to re-allocate staff in a more cost-effective manner on existing contracts and to discontinue those contracts that are not sufficiently profitable.

Our strategy of achieving margin improvement through balancing onsite and test centre delivery has also been successful during the period. In addition, we maintain our focus on targeting new business within the six key industry verticals in which SQS has strongest domain, application and technology expertise. The banking and financial services vertical performed best during the period and the acquisition of SQS India BFSI has greatly enhanced our positioning in this sector.

Dividend

In line with our stated policy of paying out approximately 30% of adjusted profit after tax as a dividend, SQS proposes to pay a dividend for the full year of €0.13 per share (2013: €0.09). Subject to shareholder approval the dividend will be paid following the AGM (on 27 May 2015) with a pay date/post cheques date on 28 May 2015. The record date will be 15 May 2015, with ex-dividend date 14 May 2015. In accordance with German law, SQS pays one dividend in each financial year.

Board

In May 2014 Lothar Pauly was appointed to our Supervisory Board (the "Board"). Additionally Peter Bölter was appointed as an employee representative to the Supervisory Board, according to German company law.

Mr. Lothar Heinrich Andreas Pauly, is the owner and Managing Director of Lothar Pauly Management Consulting and is also currently a Director of Bakcell, Mobiserve and B2X. Mr. Peter Gerhard Siegfried Bölter, is a Delivery Manager at SQS, and also the President of intacs e.V.

Following Prof. Werner Mellis's, the chairman of the Board and member of the Board since 1999, decision not to seek re-election at the Company's AGM, David Bellin and Lothar Pauly were appointed Chairman and Vice Chairman of the Board respectively.

In addition, Matthias Baunach was not re-elected as employee representative at the AGM in May and subsequently left the Board. We would like to thank both Prof. Werner Mellis and Matthias Baunach for their contributions to the Company.

Post the period end, Riccardo Brizzi has decided to leave SQS as Chief Operating Officer (COO) and main board member of SQS Software Quality Systems AG in March 2015. After almost three years as COO of SQS, Riccardo plans to pursue new business challenges in the industry.

We would like to thank Riccardo for his contribution to SQS and wish him all the best for his future plans.

Employees

Total headcount at the period end had increased 39% to 3,875 (31 Dec 2013: 2,789) with an optional circa 210 contractors retained during the period. As well as organic expansion, this increase includes SQS India BFSI's circa 900 staff members which have been included into the total headcount from the beginning of 2014.

Outlook

We are delighted to have again delivered on all our key performance indicators during the period. It is particularly pleasing to report further revenue growth from more complex, higher margin Managed Services contracts for our larger clients. Operating margins are up and we finished the year with net cash on the balance sheet.

The Company is now serving larger contracts across our global client base and we expect the trend to continue for the foreseeable future. Our global industrialised delivery model lends itself well to scalability and strong cash generation. We have achieved a major step forward in the development and application of re-usable assets. This strengthens our global delivery capacity, supports organic growth and facilitates the rapid and effective integration of acquisitions.

We foresee a number of exciting growth opportunities, particularly in the US, and plan to further diversify our geographic revenue split. We expect to make further announcements in this context in due course. The board looks forward to the current year with cautious optimism."

Diederik VosChief Executive Officer4 March 2015

Financial Review

Summary

Revenues grew by 18.9% to €268.5m (FY 2013: €225.8m), including a first time consolidation effect for the full period of Thinksoft (now SQS India BFSI) of €26.0m. Organic revenue increased by 7.4% compared to 2013.

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 up to five years) of which a growing share (in many cases) is delivered from nearshore and offshore test centres. This also includes long term engagements for testing standard software package products;

· Specialist Consultancy Services (SCS) to meet the demand of clients seeking transformation and quality in specialized projects with skills like SAP, PLM (Product Lifecycle Management), Process Consulting and Improvement, and Load and Performance Testing as long as these resources are not active in MS projects; and

· 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 segments we conduct business with contractors (as far as these have not been included in MS), training & conferences and software product testing tools summarized as "Other".

Breakdown by business unit

Managed Services (MS)

Revenue in MS, our largest segment and our key strategic focus, amounted to €120.5m in the period (FY 2013: €91.1m), an increase of 32.3% on the prior year, representing a group revenue contribution of 45%. The increase in revenue predominantly came from the extension of existing long term managed services contracts and from the first time consolidation of SQS India BFSI.

Specialist Consultancy Services (SCS)

Our business in this segment saw a decline during the period of -43.6% to €20.7m (FY 2013: €36.7m), representing a group revenue contribution of 8%. This occurred primarily as the result of the reclassification of one major banking client to Managed Services in 2014 and continued demand for these ERP, PLM and process specialists in MS engagements (thus their revenue and margin contribution is counted under MS above).

Regular Testing Services (RTS)

This segment grew by 32.6% in revenues to €102.1m (FY 2013: €77.0m) on the prior year, representing a group revenue contribution of 38%. This sudden jump partly came as a one time effect from the first time consolidation of SQS India BFSI, whose share of revenues classified as RTS has been above the previous SQS ratio. Our strategy continues to be to reduce the share of this segment of our total revenue below 30%, which is evidenced by the ongoing reduction of our total client number to 423 (FY 2013: 468), despite additional c. 50 clients from SQS India BFSI during the period. 

Other

Revenue in the Other segment amounted to €25.2m in the period (FY 2013: €21.0m), an increase of 20.0% on the prior year and representing a group revenue contribution of 9%. An increase in revenues from contractors was the key driver of this performance. 

Margins and Profitability

Adjusted Gross profit* improved by 23.9% to €89.6m (FY 2013: €72.3m), with the gross margin at 33.4% (FY 2013: 32.0%). The increase in the gross margin was mainly influenced by a higher share and an improved gross margin from managed services contracts with a gross margin of 36.8% (FY 2013: 34.2%) due to a growing proportion of contracts now delivered in a global delivery mode utilizing more the SQS near and offshore test centres and test automation.

Gross margins from SCS were 35.2% (FY 2013: 36.0%) and RTS 32.3% (FY 2013: 30.2%) reflecting the reclassification of one major banking client from SCS to Managed Services and a first time consolidation effect from SQS India BFSI in RTS.

Adjusted** profit before tax for the period was €18.8m (FY 2013: €12.4m), an increase of 52.1%, with the adjusted profit margin rising to 7.0% (FY 2013: 5.5%). The profit before taxes benefitted from the strong gross margin improvement and slightly reduced overhead costs as a percentage of revenue.

Adjusted*** earnings per share increased to €0.43 (FY 2013: €0.30).

* adjusted to add back €2.0m of IFRS amortisation of order backlog from SQS India BFSI acquisition

** adjusted to add back effect under * and €5.4m of IFRS amortisation of client relationship assets from SQS India BFSI acquisition, €0.6m of non-recurring severance costs for the SQS India BFSI founders and €0.2m acquisition costs for SQS India BFSI, €0.4m of pro forma IFRS forex adjustments of SQS India BFSI acquisition value and €0.1m pro forma interests on pensions

*** adjusted to add back effect under ** at actual local GAAP tax rate of 26%, less €0.8m on minority interests

Costs

General & Administrative expenses (before effects under ** above) for the period were €45.3m (FY 2013: €38.5m). While decreasing 0.2% as a percentage of revenue to 16.9%, the absolute growth was mainly due to a first time consolidation effect of SQS India BFSI (€5.9m) and on-going investment in the US business (€0.6m).

Sales & Marketing costs for the period were €20.7m (FY 2013: €17.3m), representing 7.7% of sales (FY 2013: 7.7%). The absolute increase mainly came from the first time consolidation of SQS India BFSI (€2.2m).

Research & Development expense during the period was slightly up at €3.8m (FY 2013: €3.2m) representing 1.4% (FY 2013: 1.4%) of revenues. Research and development investment was mainly focused on the development of software testing tools and our proprietary PractiQ methodology.

Cash Flow and Financing

Cash flow from operating activities increased to €26.6m (FY 2013: €22.8m). This strong operating cash flow represents a 103% conversion of EBITDA to operating cash flow and is typical for a fiscal year end, whereas we see a seasonality with much lower operating cash flow at the half year end.

Debtor days (including work in progress) decreased by 10 days from H1 2014, but year on year increased to 72 (FY 2013: 64), mainly resulting from the first time consolidation of SQS India BFSI receivables, whose debtor days were at 94.

Cash outflow from investments was down to €0.0m (FY 2013 €23.9m outflow) mainly due to an exceptional first time consolidation effect of SQS India BFSI with an acquired cash position of €7.3m. Investment in the third phase of the building for our Pune (India) offshore test centre continued, increasing the cash outflow for fixed and intangible assets to €8.0m (FY 2013 €6.2m outflow).

Total cash outflow from financing activities was €8.8m (FY 2013: 9.6m inflow) reflecting a net decrease of finance loans (including leasing contracts) of €3.8m as a result of the strong operating cash flow. Additionally dividend payments to SQS and minority shareholders resulted in an outflow of €3.4m (FY 2013: 2.0m). The purchase of further 2.2% of the issued share capital of SQS India BFSI resulted in a cash outflow of €1.8m.

Balance Sheet

We closed the period with €26.3m (31 Dec 2013: €15.2m) of cash and cash equivalents on the balance sheet and borrowings of €16.5m (31 Dec 2013: €18.1m). While the first time consolidation of SQS India BFSI led to a one time increase of the cash position of €7.3m (with certain legal restrictions to transfer these funds), cash reserves are increasingly held in a higher diversity of currencies and offset between cash positions and debt positions has become less flexible as we seek to exclude the realization of potential exchange rate risks.

The resulting net cash position at the period end was therefore €9.8m (31 Dec 2013: net debt of €2.9m).

Due to the purchase price allocation with regard to the SQS India BFSI acquisition, intangible assets with a fair value of €21.3m have been identified and recorded within the balance sheet. Of these €21.3m, €3.9m have been allocated to goodwill, €15.6m have been allocated to client relations and €1.9m to the acquired order backlog. Client relations are amortised over a three year period resulting in €5.4m amortization, while order backlog has been amortised over a 12 months period resulting in €2.0m amortization in the reporting period. As these amortization charges are non-cash-items and do not impact the normal business of SQS they are adjusted within the PBT und EPS reporting. 

Taxation

The tax charge of €3.3m (FY 2013: €3.4m) includes current tax expenses of €5.0m (FY 2013: €3.7m) and deferred tax expenses of €-1.7m (FY 2013: €-0.3m). The tax rate on local GAAP results was 26% (FY 2013: 31%), the lower tax rate being a consequence of a geographically more favourable spread of profits. Going forward, we expect an actual tax rate of ca. 30%.

Foreign Exchange

Approximately 56% (FY 2013: 58%) 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 twelve-month-period of 2014 was chosen. For the conversion of the balance sheet items from local currency into Euros, the official exchange rate as at 31 December 2014 was used.

Foreign exchange had a small €0.4m 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 FY 2013, our non-Euro revenues for the period would have been €2.4m lower, resulting in an decrease in PBT of €0.4m.

International Financial Reporting Standards (IFRS)

The Interim Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group") are prepared in conformity with all IFRS (International Financial Reporting Standards, formerly International Accounting 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 2014.

The SQS Group Consolidated Financial Statements for the twelve month period ended 31 Dec 2014 were prepared in accordance with uniform accounting and valuation principles in Euros.

Rene Gawron,

Chief Financial Officer

4 March 2015

Notes to the Consolidated Financial Statements

at 31 December 2014

1. Description of business activities

SQS, based in Cologne, Germany, is the world's largest specialist supplier of software quality services by revenue. SQS is independent from software vendors and other IT service suppliers. It can therefore provide unbiased opinions to customers on software products and projects it is engaged to assess and improve. SQS offers services designed to support the quality of software and IT systems from initial project definition through the development stage and up to final implementation and, thereafter, in ongoing maintenance.

For more than thirty years, SQS has been offering a comprehensive range of consulting services for enterprise and technical software systems to its clients who include "blue chip" companies in a variety of sectors, such as financial services, telecommunications, logistics and manufacturing. SQS currently has 3,875 employees at the end of 2014 (previous year 2,789 employees) across Europe, Asia, North America and Africa. SQS has a strong presence in Germany and the UK and offices in Austria, Egypt, Finland, France, India, Ireland, the Netherlands, Norway, South Africa, Sweden, Switzerland, Singapore, Australia, Malaysia, Belgium, the United Arab Emirates and the United States of America. Furthermore, SQS has a minor stake in an operation in Portugal and a partnership operation in Spain.

SQS is listed on the London Stock Exchange (AIM) and is also traded on Deutsche Börse, Frankfurt.

2. Summary of Significant Accounting Policies

Basis of preparation and statement of compliance

The Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group" or "SQS Konzern") are prepared in conformity with all IFRS Standards (International Financial Reporting Standards) and Interpretations of the IASB (International Accounting Standards Board) endorsed by the European Commission and translated into the German language which are to be applied for those financial statements whose reporting period starts on or after 1 January 2014.

The Financial Information has been prepared on a historical cost basis. The Financial Information is presented in Euro and amounts are rounded to the nearest thousand (€k) except when otherwise indicated.

First-time application of new standards and changes in accounting policies

SQS has applied the Standards and Interpretations of the IASB as applicable in the EU which are binding for financial years commencing on or after 1 January 2014.

SQS does not apply any further changed or newly passed standards prior to the implementation date stipulated. According to the assessment of SQS, the application of these standards would not have any material effect on the financial statements of SQS Group.

The adoption of the following new and amended IFRS and IFRIC interpretations was mandatory for accounting periods beginning on 1 January 2014:

IFRS 10 Consolidated Financial Statements - Guidelines for limiting the scope of consolidation

IFRS 11 Joint Arrangements - Accounting for acquisitions or interests in joint operations

IFRS 12 Disclosures of Investments in Other Entities - Disclosure requirements for interests held in other entities#

IAS 27 Separate Financial Statements - Limiting IAS 27 to separate financial statements

IAS 28 Shares in Associates and Joint Ventures - Revision of accounting rules for associated companies and joint ventures

IAS 32 Financial Instruments: Presentation - Disclosures on the Offsetting of Financial Assets and Financial Liabilities

IAS 36 Impairment of Assets - Recoverable Amount Disclosures for Non-Financial Assets

IAS 39 Financial Instruments: Novation of Derivatives and Continuation of Hedge Accounting

IFRIC 20 Stripping costs in the production phase of a Surface Mine

IFRIC 21 Levies - Guidance on when to recognize a liability for a levy impost by a government

The impact of new standards and amendments that require restatements of previous financial statements of SQS Group are as follows:

IFRS 10 The consolidation and purchase price allocation of SQS India BFSI (formerly: Thinksoft Global Services Limited has been performed according to IFRS 10. IFRS 10 had no impact on the other subsidiaries held by SQS. There was no discrepancy between the expected impact and the effective impact of the first time adoption of IFRS 10.

IFRS 12 According to IFRS 12 the disclosures regarding investments in other entities and non-controlling interests have been extended

IAS 36 The amendments to IAS 36 clarify the disclosure requirements in respect of fair value less costs of disposal. In accordance with these amendments SQS shall not be required any longer to disclose the recoverable amount for each cash-generating unit for which the carrying amount of goodwill allocated to that unit was significant in comparison with the entity's total carrying amount of goodwill. These amendments only require the disclosure of the recoverable amounts for the assets or CGUs for which impairment loss has been recognised during the period.

The following standards and amendments to existing standards have been published and have been endorsed by the European Commission for the group's accounting periods beginning after 1 January 2015 or later periods, but the group has not early adopted them:

IFRS 9 Financial instruments: Disclosures - Regulations for the accounting of financial instruments measured at amortized cost or Fair Value

IFRS 10 / IAS 28 Consolidated Financial Statements - Sale or contribution of assets between an investor and an associated company or jointly controlled entity

IFRS 11 Joint Arrangements - Accounting for acquisitions or interests in joint operations

IFRS 14 Regulatory Deferral Accounts - Exemption option for first-time IFRS adopters

IFRS 15 Revenue from Contracts with Customers - Broad revenue recognition concept

IAS 16, 38 Intangible assets and property, plant and equipment - Amendments to acceptable methods of depreciation and amortization

IAS 16, 41 Biological assets and property, plant and equipment - Amendments to accounting for bearer plants

IAS 19 Defined Benefit Plans - Recognition of contributions from employees or third parties to defined benefit plans

IAS 27 Separate Financial Statements - Application of the equity method in separate financial statements Improvements projects 2010 - 2013 and 2012 - 2014 regarding several improvements of existing standards

Except from IFRS 15 and the amendment to IAS 19 none of these standards and amendments will most likely have any material impact on the annual consolidated financial statements of the SQS Group.

Basis of consolidation

The consolidated financial statements comprise the financial statements of SQS Software Quality Systems AG and its subsidiaries as at 31 December each year. Subsidiary company financial statements are prepared on a basis consistent with those of other SQS Group companies. All companies in the SQS Group have the same accounting reference date of 31 December.

Subsidiaries are consolidated from the date on which control is transferred to the SQS Group and cease to be consolidated from the date on which control is transferred out of the SQS Group. In general SQS obtains and exercises control through voting rights. In case of SQS India BFSI (formerly Thinksoft Global Services Limited), SQS obtained control by gaining the majority within the Board of Directors.

All inter-company balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full.

As at 31 December 2014, the following subsidiaries have been fully consolidated:

SQS AG holds 15% of the shares of SQS Portugal Lda with a book value of € nil (at 31 December 2013: € nil).

On 1st January 2014 SQS gained control of SQS India BFSI Limited (former: Thinksoft Global Service Limited ("Thinksoft")), Chennai/India, by obtaining a majority in the Board of Directors.

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 Arabian Emirates. None of these companies each has a main impact on the financial data of the group.

Foreign currency translation

The Euro (€) is the functional and reporting currency of the parent company and its Euroland subsidiaries. For these entities, transactions in foreign currencies are initially recorded in the functional currency at the exchange rates valid at the date of the transaction. Monetary assets and liabilities denominated in such foreign currencies are retranslated at the rates prevailing on the balance sheet date. All differences arising from translation of monetary items are recognised in profit or loss.

Translation differences on items whose fair value gain or loss is recognised in other comprehensive income or profit or loss are recognised in other comprehensive income or profit or loss, respectively.

The following subsidiaries have their own functional currency:

At the reporting date, the assets and liabilities (including any goodwill) of these subsidiaries are translated into Euros at the exchange rate valid at the reporting date. As the exchange rates did not fluctuate significantly in 2014. Thus the items of the income statement of these entities were translated at the weighted average exchange rate for the year 2014. The exchange differences arising on translation are recognised in other comprehensive income and accumulated in a separate reserve in equity.

The functional currency of SQS BFSI Inc., USA, Thinksoft Global Services (Europe) GmbH, Germany, SQS BFSI UK Ltd., UK, SQS BFSI Pte Ltd, Singapore and SQS BFSI FZE, United Arab Emirates is the Indian Rupee as the activities of these foreign operations are carried out as extensions of SQS India BFSI, Chennai. Exchange differences regarding these entities are recognised in profit or loss.

On disposal of a foreign entity, the cumulative amount of exchange differences relating to that particular foreign entity is reclassified from equity to profit or loss when the gain or loss on disposal is recognised.

3. Segmental reporting

Based on the organizational structure and the different services rendered, SQS Group operates the following segments:

· Managed Services (MS) to meet the demand of clients seeking efficiency in long-term engagements (between six months up to five years) of which a growing share (in many cases) is delivered from nearshore and offshore test centres. This also includes long term engagements for testing standard software package products,

· Specialist Consultancy Services (SCS) to meet the demand of clients seeking transformation and quality in specialized projects with skills like SAP, PLM (Product Lifecycle Management), Process Consulting and Improvement, and Load and Performance Testing as long as these resources are not active in MS projects,

· Regular Testing Services (RTS) to meet the demand of more price conscious clients who tend to be served on a more local basis and are typically contracted for a short term (e.g. three months).

Beside these major segments there is the business with contractors (as far as these have not been included in MS), training & conferences and software testing tools. Each of these minor operating segments represents less than 10 % of the Group's revenues and the Group's profit. Thus, all these other segments are presented as "Other".

The group management board consisting of CEO (Chief Executive Officer), CFO (Chief Financial Officer), COO (Chief Operating Officer) and CMO (Chief Market 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 Portfolio 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 not allocated but 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 years ended 31 December 2014 and 2013.

The following revenue information by geographical regions is based on the location of the customer. The information disclosed for non-current assets relates to property, plant and equipment and intangible assets including goodwill.

4. Group Information on non-controlling interest

The consolidated financial statements of the Group include the following non-controlling interests:

SQS AG issued a puttable instrument to the minority shareholders of SQS India Infosystems Pvt. Ltd. This puttable instrument includes a contractual obligation for SQS AG to purchase the outstanding shares of SQS India Infosystems Pvt. Ltd. SQS group assesses and presents this obligation as a financial liability at fair value. Consequently the consolidated financial statements of SQS do not show any non-controlling interests regarding SQS India Infosystems Pvt. Ltd.

5. Business combinations and acquisition of non-controlling interests

On 8 November 2013 SQS AG signed a share purchase agreement in order to acquire the majority of the issued share capital of SQS India BFSI Limited (former: Thinksoft Global Services Limited), Chennai.

On 27 December 2013, in a first step, SQS acquired 25.76 % of the shares in SQS India BFSI. On 1 January 2014 SQS obtained control. At this date SQS took over the majority in the board of directors of SQS India BFSI and was able to govern the entity. On 3 April 2014 the acquisition was completed. By then SQS acquired 53.35 % of the issued share capital of SQS India BFSI.

SQS India BFSI is one of the largest independent software testing companies in India focused on the Banking, Financial Services and Insurance sector ('BFSI') and is listed on Bombay Stock Exchange ('BSE'). SQS acquired SQS India BFSI with regard to the key strategic focus of SQS on the expertise in the fast growing BFSI sector. The acquisition brings new customer relationships in a number of SQS's core geographies, including India and USA and gives SQS a presence in additional countries like Australia, Singapore and Belgium as well as the United Arabian Emirates.

The acquisition has been accounted for using the acquisition method at the acquisition date of 1 January 2014. SQS Group measured the non-controlling interests in the acquiree at the proportionate share of its interest in the acquiree's identifiable net assets.

Assets acquired and liabilities assumed

The fair value of the identifiable assets and liabilities of SQS India BFSI as at the acquisition date were determined as follows:

* Within the purchase price allocation customer relationships in an amount of €15,575k and an order backlog of € 1,881k were identified and measured at fair value at the acquisition date.

Furthermore, the fair value of the recognised land, buildings and improvements exceeded their carrying amount by €506k.

All in all, these alterations resulted in deferred tax liabilities amounting to €6,017k.

The goodwill of €3,789k reflects the acquired work force as well as expected synergies arising from the acquisition. The Goodwill is allocated to the cash generating unit "SQS India BFSI".

None of the goodwill recognised is expected to be deductible for income tax purposes.

With regard to the acquired receivables Management expects that all of the amount will be collected.

Analysis of cash flows on acquisition:

SQS India BFSI has been fully consolidated since 1 January 2014.

On 4th December 2014, SQS acquired a further 226,223 shares for an amount of INR 137.5m (€1.76m).

Transaction costs of €192k (2013: €151k) have been recognised in administrative expenses as well as operating cash flow.

6. 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

The cost of material included in the cost of sales in the year ended 31 December 2014 amounted to €24,862k (2013: €22,147k). 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

The expenses for retirement benefits include current service costs regarding defined benefit plans and expenses for defined contribution plans.

The average numbers of employees in the operating segments of the SQS Group were as follows:

Government grants

Government grants in the amount of €164k (2013: €0k) have been granted as invest support for test centre in Northern Ireland and have been recognised as income. SQS has provided a guarantee that the local company is able to establish those employments. Furthermore SQS recognised government grants in the amount of €83k regarding a test centre in Austria.

Amortisation and Depreciation

Amortisation and depreciation charged in the year ended 31 December 2014 amounted to €13,444k (2013: €9,082k). Of this, €3,815k (2013: €3,505k) was attributable to the amortisation of development costs.

Rentals and leasing

Operating lease costs in connection with office space and equipment in 2014 amounted to €7,756k (2013: €6,668k).

The lease contracts will expire in 2016. Some of them can be prolonged or renewed, some allow price alignments.

7. Net finance costs

The net finance costs are comprised as follows:

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

8. Taxes on earnings

SQS Software Quality Systems AG in Germany is liable to corporate income tax, the solidarity surcharge and trade income tax. The German corporate income tax rate amounts to 15 % (2012: 15%). A 5.5% solidarity surcharge is imposed on the corporate income tax rate being effective with a rate of 0.825%. The trade income tax amounts to 16.6% of the taxable income. Consequently the total income tax rate in Germany amounts to approximately 32 %.

Consolidated income tax expense is as follows:

A reconciliation between actual tax expense and the product of group accounting profit multiplied by the tax rate of SQS AG is as follows:

Deferred taxes with an amount of €626k (2013: €(139)k) were charged to other comprehensive income.

SQS has capitalised a corporate tax credit at a present value of €538k (at 31 December 2013: €699k). The present value has been discounted using an interest rate of 5.5%. The tax credit will be paid off by three further instalments until 2017. In the statement of financial position it is presented as non-current income tax receivable. 

For the assessment of deferred tax assets and liabilities the local tax rates of the respective entities of SQS Group are applied.

Deferred income tax relates to the following financial positions:

Deferred tax assets are recognised when it is considered probable that economic benefit will flow to the entity. The probability of future economic benefits is assessed by management based on the taxable profits realised in the past and on the expectations and planning regarding the foreseeable future.

Where a company has suffered losses, deferred tax assets thereon are recognised if the ability in the future to set off the losses with future income is permissible under the respective national provisions. According to the planning of SQS AG, SQS Norway and SQS France, taxable profits are regarded as probable.

As the entities in France, Sweden, Finland and the US have not generated any profit yet, the tax losses of these entities with a cumulative amount of € 7,008k (at 31 December 2013: €3,628k) have not been capitalised.

9. Earnings per share

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

Undiluted profit per share is calculated by dividing the profit for the year attributable to equity shareholders by the weighted average number of shares in issue during 2014: 30,562,679 (2013: 28,201,084).

Diluted profit per share is determined by dividing the profit for the year attributable to equity shareholders by the weighted average number of shares in issue plus any share equivalents which would lead to a dilution.

Management considers that the stock options given to management board and key employees may have a dilutive effect. On a weighted average basis shares resulting from stock option programmes amounted to 2,099,616 (2013: 677,703) shares. The number of potential shares is calculated on a pro rata basis. Instruments that could potentially dilute basic earnings per share in the future are authorised capital and conditional capital.

The adjusted profits per share 2014 and 2013 are calculated based on the profit before tax:

10. Intangible assets and goodwill

The composition of this item is as follows: