Half Year Report

13 September 2017

SQS Software Quality Systems AG

("SQS" or the "Company")

Results for the six months ended 30 June 2017

SQS Software Quality Systems AG (AIM: SQS), the leading global provider of quality assurance services for digital business processes, today announces its unaudited results for the six months ended 30 June 2017.

These first half results further demonstrate progress in implementing the Company's medium term strategy to help customers migrate towards a more digital focused business model. In pursuing this strategy, SQS intends to deliver sustainable improvements in gross margin, adj. EBIT and the annual dividend distribution, which is evidenced in the numbers presented here.

Financial Highlights

· Total revenue decreased 3.9% to €160.1m (H1 2016: €166.6; H2 2016: €160.5m)

o At constant currencies, revenue would have been €1.7m higher at €161.8m

o Decrease due to one banking client loss of €7.0m

· Gross margin improved by 90bps to 32.6% reflecting more efficient and automated service delivery

· Adjusted* gross profit decreased 1.1% to €52.2m (H1 2016: €52.8m)

· Adjusted* EBIT increased by 5.4% to €12.1m (H1 2016: €11.5m)

o Reflecting improved gross margin, continued focus on improved operating profit margins and strict cost management

o Adj. EBIT margin increased to 7.5% (H1 2016: 6.9%)

· Adjusted* PBT increased by 7.9% to €12.8m (H1 2016: €11.9m)

o Includes a net positive finance result (net interest and realised forex results of €0.7m, H1 2016: €0.4m)

· Adjusted EPS* increased by 18.2% to €0.26 (H1 2016: €0.22)

o Driven by better operational profitability, a lower local GAAP tax rate and a positive effect from a lower minority profit share

· Operating cash outflow at €(6.6)m (H1 2016: €(1.2)m)

o Reflecting typical H1 seasonality from bonus pay outs and deferral of larger client invoicing and payments to H2

o Full year expecting another year of strong EBITDA to operating cash flow conversion

· Net debt €32.6m (at as 31 Dec 2016: net debt €12.4m, as at 30 June 2016: net debt €32.9m)

o Reflecting effects from operating cash outflow, normalised capex outflow of €4.0m and dividend payments of €4.8m during H1

(*) Notes regarding adjustments can be found in the financial review section.

Operational Highlights

· A number of new clients secured in H1 with further contracts expected to begin in the second half of the year

· Momentum within Management Consulting ("MC") continued during the first half of 2017, now accounting for 18.8% of total revenues in H1 (H1 2016: 17.2%)

· Continued demand for Managed Services ("MS") offering (now at 46% of revenues, H1 2016 at 47%), including a €4.0m contract with a European online payments processing business

· More than 52% of total revenues now derived from "digital" engagements where SQS executes on a digital strategy or transformation to open up new business models (up from 40% of total revenues in the year to 31 December 2016)

· Improved operational efficiency through more consistent use of automation in project delivery

· Healthy pipeline including opportunities across all major industries

Diederik Vos, Chief Executive Officer of SQS, commented:

"SQS continues to deliver on its strategy to equip its clients with best in class digital transformation services. This can be seen in solid gross margin and EBIT growth, a clear product of our continued focus on increasing profitability through our consistently improving service delivery and shift to higher margin MC projects, which will drive future growth.

We are seeing healthy demand for our service offering, with continued good performance across all our verticals - including our core technology and automotive sectors - and we are excited about the increasing breadth of our addressable market, as a result of the quality of the Company's approach, expertise and product set. As an increasing number of businesses seek to use smarter, more automated processes to boost operational efficiency, meet evolving regulatory standards and remain competitive, the Company is well positioned to capitalise on favourable industry trends over the next few years.

Looking ahead, SQS expects H2 2017 revenues to be above H1, despite current currency headwinds. With an exciting market, a good pipeline and an improving EBIT margin we have a great opportunity to continue growing the returns to shareholders."

Enquiries:

About SQS

SQS is the leading global provider of quality assurance services for digital business processes. This position stems from over 35 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, industrialised automation processes and deep domain knowledge in various industries. Headquartered in Cologne, Germany, the company now employs approximately 4,400 staff. SQS has offices in Germany, UK, US, Australia, Austria, Egypt, Finland, France, India, Ireland, Italy, Malaysia, the Netherlands, Norway, Singapore, South Africa, Sweden, Switzerland and UAE. In addition, SQS maintains a minority stake in a company in Portugal. In 2016, SQS generated revenues of €327.1 million. 

SQS is the first German company to have a primary listing on AIM, a market operated by the London Stock Exchange. In addition, SQS shares are also traded on the German Stock Exchange in Frankfurt am Main. 

With over 10,000 completed projects, SQS has a strong client base, including half of the DAX 30, nearly a third of the EURO STOXX 50 and 20 per cent of the FTSE 100 companies.

For more information, see www.sqs.com

Chief Executive's Statement

Introduction

Through digitisation and exciting advances in technology, the global business environment continues to evolve, and that shift also includes the space that SQS occupies.

SQS is helping to make customers more agile to the challenge by increasing the speed of new technology deployment, adding greater process automation, ultimately helping to create new revenue opportunities and recognise better returns on investment.

Recent high profile IT incidents have increased the pressure on companies to ensure that digital infrastructure is robust, secure and able to adapt to meet future business needs. Decisions around what level of digital transformation to undertake and how to ensure the continuous quality and integrity of those new systems therefore become increasingly important. SQS, through its Management Consulting and Managed Services capabilities, is well positioned to support companies in these important areas.

At the same time, and because digital systems themselves change more frequently, there is growing demand for more efficient, automated and smarter processes for implementing quality assured software.

It is this growing operational agility and intelligence that SQS, mainly through its MC and MS offerings, but also through its Professional Services ("PS") capabilities, is offering to customers across all end-markets.

As outlined in the 3 July trading update, MC will become the growth engine as customer demands shift towards solutions to deploy new digital environments and ultimately deliver the quality assurance for these. To respond effectively to the changing environment, SQS continues to look to, and invest in, process automation, which remains at a relatively early stage of reaching its full potential, to deliver its services more efficiently and profitably.

Our focus is on increased profitability from operations and, in the medium term, SQS expects to be able to deliver organically an adjusted EBIT margin of at least 9% and corresponding operating cash flow improvements - the two key metrics we use to measure successful progress.

New Business

We are seeing strong demand for MC services across a number of sectors, and are pleased to have secured new clients that are among some of the world's best known global technology brands, operating at the cutting edge of digital and technology trends. Demand within automotive and manufacturing remains particularly high as the necessity for reliable, quality assured, cutting edge software capable of enabling the introduction of connected and autonomous cars is expected to grow.

MS has accounted for 45.8% of total revenues in H1 2017 (H1 2016: 46.6%). The slight decline seen in the first half was largely due to the reduced mandate from one major banking client (as announced previously). We continue to see good demand for our MS offering, evidenced by the award of a €4.0m MS contract from a European online payments processing business keen to optimise the manner in which it approaches quality assurance, and by further interest being demonstrated in the retail and logistics sectors.

In line with our strategy PS delivered 27.8% of revenues (H1 2016: 29.2%).

Regional Performance

Europe continues to be a significant growth market. As the shift to digital systems takes hold in Europe, this opens up particular opportunities for growth where we already enjoy strong existing customer relationships and brand awareness. This is particularly the case in our core geographies of Germany, Ireland and Italy where we have made good progress, experiencing solid net organic growth.

The US remains a key geography for us, given its position as the largest single addressable software quality and consulting services market. As expected, revenue share from the US in H1 2017 was marginally down year-on-year at 15.0% of total revenue (H1 2016: 17.0%) as some of the key industries in which SQS is active in the US remain subdued. Following recent market uncertainty we have seen businesses in the US delay making business decisions, particularly in healthcare and financial services, whilst some policy and regulatory frameworks remain uncertain under the current government. At the same time we have won a number of initial contracts with US technology businesses which are expected to contribute to growth in the second half and beyond. The Company's acquisitions have given SQS the capabilities and brand awareness needed to drive future growth in this key geography.

Strategy

SQS continues to deliver on its strategy to remain at the centre of digital transformation and, in doing so, support its clients across all stages in their shift to automation and digitisation, chiefly in:

· assessing their digital readiness

· shaping their digital strategy and ensuring its effective deployment

· aligning software quality with business strategy

· ensuring the continuous quality and integrity of the software once deployed

As we innovate and expand our services portfolio, we continue to increase the breadth of our capabilities and grow the scale of our service offering, to best cater to the needs of our clients. This includes deploying faster and better performing technology, and implementing process automation across the organisation, to open up new revenue streams and greater operational efficiencies for the businesses we work with. 

We are focussed on continuing to drive up profitability from our operations and believe we can achieve this organically to deliver an improved EBIT margin and operating cash flow. Whilst we continue to integrate our US acquisitions, new acquisition opportunities are likely to be more focussed on Europe where they are expected to further strengthen the Company's offering for its clients.

Dividend

In accordance with German law, SQS pays one dividend in each financial year. We expect to declare a dividend with our final results for the year ending 31 December 2017, in line with our current policy of paying out approximately 30% of adjusted profit after tax as a dividend.

Employees

Total headcount as at 30 June 2017 was 4,402 (30 June 2016: 4,612), with an additional circa 240 contractors retained during the period. This is in line with revenue development and reflects our continued focus on delivering an increasingly automated service to our clients. Further operational efficiencies can be expected.

Outlook

SQS continues to deliver on its strategy to equip its clients with best in class digital transformation services. This can be seen in solid gross margin and EBIT growth, a clear product of our continued focus on increasing profitability through our consistently improving service delivery and shift to higher margin MC projects, which will drive future growth.

We are seeing healthy demand for our service offering, with continued good performance across all our verticals - including our core technology and automotive sectors - and we are excited about the increasing breadth of our addressable market, as a result of the quality of the Company's approach, expertise and product set. As an increasing number of businesses seek to use smarter, more automated processes to boost operational efficiency, meet evolving regulatory standards and remain competitive, the Company is well positioned to capitalise on favourable industry trends over the next few years.

Looking ahead, SQS expects H2 2017 revenues to be above H1, despite current currency headwinds. With an exciting market, a good pipeline and an improving EBIT margin we have a great opportunity to continue growing the returns to shareholders.

Diederik Vos

Chief Executive Officer

13 September 2017

Financial Review H1 2017

Summary

Revenues of €160.1m have remained at largely the same level as H2 2016, which represents a decline of 3.9% to H1 2016 (H2 2016 €160.5m, H1 2016: €166.6m), including a negative revenue impact from translational forex of €1.7m and the effect of one banking client loss of €7.0m.

The business units, which represent the accounting segments according to IFRS 8, are:

· Our Managed Services (MS) business unit meets the demand of clients seeking efficiency in long-term engagements (between twelve months and five years) of which a substantial share is delivered from nearshore and offshore delivery centres. This also includes long term engagements for quality assurance services on standard software package products. MS continues to perform well, generating good quality of earnings for the Group;

· Our Management Consulting (MC) business unit meets the demand of clients seeking transformation and quality through IT Portfolio Programme and Project Management, Digital Transformation Consulting, Business & Enterprise Architecture, Process Modelling and Business Analysis. Our MC services portfolio offers strong opportunities for growth and opens broader addressable markets;

· Our Professional Services (PS) business unit meets the demand of more price conscious clients in IT projects who tend to be given a smaller number of consultants on a more local basis and typically contracted for a short term period (e.g. three months);

Alongside these major segments we conduct business with contractors (as far as these have not been included in MS or MC), training & conferences and software testing tools summarised as "Other".

Breakdown by business unit

Managed Services (MS)

Revenue in MS, our largest segment and one of our strategic focus areas, amounted to €73.4m in the period (H1 2016: €77.6m), a decrease of (5.4)% on the prior year, representing 46% of Group revenue. The decrease in revenue predominantly came from the scope reduction of a larger banking managed services contract that had ended last year.

Management Consulting (MC)

Revenue in this segment, our other strategic focus area, saw an increase during the period of 5.2% to €30.1m (H1 2016: €28.6m), representing 19% of Group revenue, up from 17% at H1 2016. Growth for this segment was mainly driven by organic growth and a build up of MC business in the key European markets.

Professional Services (PS)

Revenue in this segment decreased by (8.4)% to €44.5m (H1 2016: €48.6m) on the prior year period, representing 28% of Group revenue. The revenue reduction has been in line with our strategy to continue to reduce the share of this lower margin segment to a range of around 25% of our total revenue.

Other

Revenue in the "Other" segment amounted to €12.1m in the period (H1 2016: €11.8m), an increase of 2.5% on the prior year and representing 7% of Group revenue. A slight increase in revenue from contractors was the key driver for this development.

Margins and Profitability

Operating profits and margins were adjusted(*), as in all previous reporting periods, by the following non-cash items and acquisition costs:

· Adjustment on gross profit:

o €0.33m for amortisation of order backlog of acquired companies

· Adjustment on G&A costs:

o €0.70m for amortisation of client relationship of acquired companies

o €0.25 for acquisition costs

The above adjustments account for the difference between reported EBIT of €10.8m and Adjusted EBIT of €12.1m. Further adjustments are made to the reported finance costs and tax charge as below, in order to derive Adjusted PBT and Adjusted Earnings respectively:

· Adjustment on finance result:

o €0.3m for pro forma interests on deferred payments for acquisitions

· Adjustment on taxes:

o €(0.6)m profit tax adjustment, as actual local GAAP profit taxes are higher than IFRS taxes including deferred taxes

Adjusted* gross profit decreased by 1.1% to €52.2m (H1 2016: €52.8m), with the gross margin up to 32.6% (H1 2016: 31.7%). The improvement in gross margin was driven by an increased blended contribution from MS and MC that deliver higher client value and better margins in the range above 36%. Gross margins in the PS segment also slightly improved to 27.6% (H1 2016: 27.0%).

Gross margins in the "Other" segment were at 20.1% (H1 2016: 16.7%) reflecting an improved contractor gross margin and a lower share from tool licences re-selling.

Adjusted* earnings before interests and taxes (adj. EBIT) for the period was €12.1m (H1 2016: €11.5m), an increase of 5.4%, with the adjusted EBIT margin at 7.5% (H1 2016: 6.9%). The adj. EBIT was driven by a blended gross margin of about 36% in MS, MC and an increased share from these two strategic business lines of 65% of total revenue (H1 2016: 64% of total revenue).

Adjusted* profit before tax for the period was €12.8m (H1 2016: €11.9m), an increase of 7.9%, with the adjusted profit margin at 8.0% (H1 2016: 7.1%). The profit before tax was driven by the effects mentioned under EBIT above, and a slightly improved finance result from lower net interest costs and better net realised exchange rate gains.

Adjusted* earnings per share were €0.26 (H1 2016: €0.22) resulting from the above outlined improvements in margins and finance results and a positive effect from a reduced minority profit share mainly from SQS India BFSI of €(0.8)m (H1 2016: €(1.3)m).

Costs

Total overhead costs (adjusted for the non-finance effects under * above) moved up to 25.1% of revenue from 24.8% in H1 2016 due to lower revenues, but overall costs came down by €1.2m.

General & Administrative expenses (adjusted for the non-finance effects under * above) for the period were €26.2m (H1 2016: €27.9m). As a percentage of revenue these costs remained flat at 16.8% (H1 2016: 16.7%). The absolute reduction was mainly due to better operational efficiencies and the increased global use of shared services.

Sales & Marketing costs for the period were €11.7m (H1 2016: €11.7m), representing 7.3% of revenues (H1 2016: 7.0%).

Research & Development expenses during the period were up at €2.3m (H1 2016: €1.7m) representing 1.4% (H1 2016: 1.0%) of revenues. This investment was focused on the development of our proprietary software testing tools, the PractiQ methodology and new platforms around predictive quality analytics. Our research technology centre in Belfast was expanded during the period to improve the competitive positioning of SQS services with more intellectual property. We expect to maintain this slightly increased level of R&D spend going forward.

Finance Income and Costs

Net finance income of €0.4m comprises net interest costs of €(0.7)m offset by foreign exchange net gains of €1.1m

Cash Flow and Financing

Cash outflow from operating activities was at €(6.6)m (H1 2016: €(1.2)m outflow). This profile of an operating cash outflow during the first half is due to the typical seasonality we have seen in previous first half year periods, reflecting payment of staff bonuses and the usual seasonal increase in debtor days (which increased to 81 as compared to 70 at the end of 2016 and 77 days at mid-2016). We therefore expect an improved cash collection and full EBITDA to operating cash conversion by the end of the full year, as in previous years.

We have also during the period adopted a significantly accelerated month end accounts closing timetable which results in increased levels of work-in-progress and a corresponding decrease in trade debtors. This has no impact on the actual billing of customers or the timing of cash receipts.

Cash outflow from investments came down to €(4.0)m (H1 2016: €(6.3)m outflow), as no payments for acquisitions or building infrastructure investments were due. The current level of investment is largely a "normalised" level for IT infrastructure and R&D spend.

Total cash inflow from financing activities was €9.6m (H1 2016: €7.2m inflow) reflecting a net increase in finance loans of €14.3m during H1 2017, mainly to fund the outflow from operating and investment activities. Additionally dividend payments to SQS Group shareholders resulted in an outflow of €(4.8)m (H1 2016: €(4.1)m outflow).

Balance Sheet

We closed the period with €23.9m (31 Dec 2016: €29.8m) of cash and cash equivalents on the balance sheet and borrowings of €56.5m (31 Dec 2016: €42.2m). The increase in borrowings was mainly due to fund the seasonal first half requirements from working capital and dividend payments. Cash reserves are held in a broader range of currencies and the transfer of funds is restricted in some geographies, such as India. Therefore, the offset between cash and debt positions has become less flexible as we also seek to avoid the realisation of negative exchange rate movements. The resulting net debt position at the period end was €(32.6)m (31 Dec 2016: net debt of €(12.4)m; 30 June 2016: net debt of €(32.9)m).

SQS has borrowing facilities with four main banks and additionally continues to have local overdraft facilities in some countries. In total its facilities with the four main banks are now €83m and are in place until 2021. These facilities are subject to customary covenants, are not secured and the borrowing costs are lower than historically.

For the acquired companies Bitmedia, Trissential and Galmont, intangible assets for client relationships and order backlog with a fair value of €8.6m were recognised in the 30 June 2017 balance sheet, reflecting a further amortisation of €1.0m during the period. On average these intangible assets are amortised over a period of up to nine years.

In total goodwill and intangible assets from the acquired companies came down to €84.6m in the H1 2017 balance sheet (YE 2016: €89.1m) resulting from the aforementioned amortisation and forex adjustments of recognised goodwill.

As these amortisation charges are non-cash-items and do not impact the normal business of SQS, they are adjusted within the Gross Profit, EBIT, PBT and EPS reporting.

Taxation

The tax charge of €3.1m (H1 2016: €2.3m) includes current tax expenses of €3.7m (H1 2016: €3.7m) and deferred tax income of €(0.6)m (H1 2016: €(1.4)m). The tax rate on local GAAP results was 28.9% (H1 2016: 31.0%), the lower tax rate being a consequence of changes in the geographic spread of profits. Going forward, we expect an actual tax rate of c. 29%.

Foreign Exchange

Approximately 61.7% (H1 2016: 55.2%) of the Group's turnover is generated in Euro. For the conversion of revenues and costs generated in other currencies into Euro, the relevant official average exchange rate for the first six-month-period of 2017 was applied. For the conversion of the balance sheet items from other currencies into Euro, the official exchange rate as at 30 June 2017 was used.

Foreign exchange had a €0.3m positive translational impact on earnings for the period. Had the Pound Sterling/Swiss Franc/Indian Rupee/Swedish Krona/Egyptian Pound/US-$/Euro exchange rates remained the same as in H1 2016, our non-Euro revenues for the period would have been €1.7m higher and the adj. EBIT would have been €0.3m lower.

International Financial Reporting Standards (IFRS)

The Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group") are prepared in conformity with all IFRS (International Financial Reporting Standards) and Interpretations of the IASB (International Accounting Standards Board) which are mandatory at 30 June 2017.

The SQS Group Consolidated Financial Statements for the 6-month period ended 30 June 2017 were prepared in accordance with uniform accounting and valuation principles in Euro.

Rene Gawron

Chief Financial Officer

13 September 2017

Notes to the interim consolidated financial statements (unaudited)

at 30 June 2017

1. Summary of Significant Accounting Policies

Basis of preparation and statement of compliance

The Interim Consolidated Financial Statements of SQS and its subsidiaries ("SQS Group") are prepared in conformity with all IFRS Standards (International Financial Reporting Standards) and Interpretations of the IASB (International Accounting Standards Board) which are mandatory at 30 June 2017. The interim consolidated financial statements for the six months ended 30 June 2017 have been prepared in accordance with IAS 34 Interim Financial Reporting. The Interim Consolidated Financial Statements have neither been audited nor reviewed.

The accounting policies applied preparing the Interim Consolidated Financial Statements 2017 are consistent with those used for the Consolidated Financial Statements at 31 December 2016.

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

The interim consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements as at 31 December 2016.

New Standards, Interpretations and Amendments

The accounting policies adopted in the preparation of the interim consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2016, except for the adoption of new standards effective as of 1 January 2017. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

The following changes to Standards and Interpretations published by the IASB are effective generally since 1 January 2017. The European Union has not endorsed the following standards and therefore these are not yet applicable for SQS:

IAS 7 Statement of Cash Flows - Disclosure Initiative (Amendment)

IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses (Amendment)

Annual Improvements Cycle 2014 - 2016 Amendments to IFRS 12 Disclosure of Interests in Other Entities: Clarification of the scope of disclosure requirements in IFRS 12.

The Group does not expect significant impacts on its Consolidated Financial Statements.

Recent accounting pronouncement, not yet adopted

In July 2014, the IASB issued IFRS 9 Financial Instruments. The new standard is effective for annual reporting periods beginning on or after 1 January 2018, while early application is permitted. The Group will adopt IFRS 9 for the fiscal year beginning as of 1 January 2018. The amendments and improvements will not have any material impact on the consolidated financial statements of SQS Group.

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers. IFRS 15 supersedes IAS 11 Construction Contracts and IAS 18 Revenue as well as related interpretations. The standard is effective for annual periods beginning on or after 1 January 2018; early application is permitted. The Group will adopt the standard for the fiscal year beginning as of 1 January 2018. Currently, it is expected that changes in the total amount of revenue to be recognised for a customer contract will be very limited. Besides, changes to the Statement of Financial Position are expected, e.g. separate line items for contract assets and contract liabilities will be required, and quantitative and qualitative disclosures will be added. The Group does not expect significant impacts on its Consolidated Financial Statements.

In January 2016, the IASB issued IFRS 16 Leases. IFRS 16 is effective for annual periods beginning on or after 1 January 2019; earlier application is permitted if IFRS 15 is already applied. The Group is currently assessing the impact of adopting IFRS 16 on the Group's Consolidated Financial Statements and will adopt the standard for the fiscal year beginning as of 1 January 2019.

Basis of consolidation

As at 30 June 2017, the Company held interests in the share capital of more than 50% of the following undertakings (all of those subsidiaries have been consolidated):

SQS AG holds 15% of the shares of SQS Portugal Lda with a book value of € nil (previous year € nil).

SQS India BFSI Ltd. is the sole shareholder of SQS BFSI Pte. Ltd., Singapore, SQS BFSI Inc., USA, Thinksoft Global Services (Europe) GmbH, Germany, SQS BFSI UK Ltd., UK, and SQS BFSI FZE, United Arab Emirates. None of these companies each has a main impact on the financial data of the group.

Use of estimates

The preparation of the Interim Financial Statements requires the disclosure of assumptions and estimates made by management, which have an effect on the amount and the presentation of revenues, expenses, assets and liabilities shown in the other comprehensive income or profit or loss, in the statement of financial position as well as any contingent items.

The main estimates and judgements of the management of SQS refer to:

· the useful life of intangible assets and property, plant and equipment

· the criteria regarding the capitalisation of development costs

· the recoverability of deferred taxes on tax losses carried forward

· the stage of completion of work in progress regarding fixed price contracts

· the discount rate, future salary increases, mortality rates, future pension increases and future employee contributions regarding the valuation of defined benefit obligations

· the inputs such as risk free rate, expected share volatility and expected dividends as well as expected forfeiture rate for the measurement of the share-based-payments

· the assumptions regarding the fair value of assets and liabilities from business combinations

There have been no changes in estimates compared to the year 2016.

2. Segmental reporting

Based on the organisational 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 substantial share (in many cases) is delivered from nearshore and offshore delivery centres. This also includes long term engagements for quality assurance services on standard software package products;

· Management Consulting (MC) (previously called Specialist Consultancy Services (SCS)) to meet the demand of clients seeking transformation and quality through IT Portfolio Programme and Project Management, Business & Enterprise Architecture, Process Modelling and Business Analysis;

· Professional Services (PS) (previously called Regular Testing Services (RTS)) to meet the demand of more price conscious clients in IT projects who tend to be served with a smaller number of consultants on a more local basis and typically contracted for a short term period (e.g. three months).

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

The group management board consisting of CEO (Chief Executive Officer), CFO (Chief Financial Officer), COO (Chief Operations Officer) and Executive Director Management Consulting 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 and Human Resources.

The non-profit centres are not allocated to the operating segments as they provide general services to the whole group. Their costs are shown under 'Non-allocated costs'.

The assets and liabilities relating to the operating segments are not reported separately to the Group Management Board. Finance costs and income taxes are managed on a group basis. Therefore they are not allocated to operating segments.

The following tables present revenue and profit information regarding the SQS Group's reportable segments for the interim periods ended 30 June 2017 and 30 June 2016 and for the year ended 31 December 2016, respectively.