6th Sep 2007 07:02
SQS Software Quality Systems AG06 September 2007 SQS Software Quality Systems AG Interim results for the six months ended 30 June 2007 SQS Software Quality Systems AG (AIM:SQS.L) the global leader in independentsoftware testing and quality management services, today announces its interimresults for the six months ended 30th June 2007. Financial Highlights: • Turnover up by 78.5% to €56.2m (H1 2006: €31.5m) • Strong organic growth of nearly 25% is almost five times higher thangrowth in the European IT Services market (1). • First-time H1 impact of Cresta added nearly 54% to Group revenues • Gross profit up 91.0% to €19.4m (HY1 2006: €10.2m) with grossmargins improving to 34.5% (H1 2006: 32.3%) • Adjusted (2) profit before tax up 168.9% to €4.6m (H1 2006: €1.7m) • Adjusted (3) earnings per share up 90.0% to €0.19 (H1 2006: €0.10) • Cash inflow from operating activities improved to €3.8m comparedwith an outflow of €0.05m in the same period last year (1) IDC/European Information Technology Observatory (EITO) study, 2007:WWW.EITO.COM (2) adjusted to add back pro forma interests required to be shown under IFRS of€0.3m on future payment milestones to the Cresta sellers (3) based on net income increased by €0.5m on IFRS tax differences and €0.3m ofpro forma interests but including actual profit taxes of €0.9m payable underlocal GAAP Operational Highlights: • Margins outpacing revenue growth due to higher pricing in the UK andGermany, as well as continuing high levels of consultant utilisation • Investment in 130 new staff - mostly consultants - to supportcurrent strong demand for SQS services and future organic growth of the business • 64 new client wins (about 15% of the total number of clients)against 100 for the whole of 2006 • Long-term contracts doubled to 14, many with offshore delivery • Strong performance in energy, financial services and automotivesectors • Acquisition of Triton after period end will immediately increaseearnings and enhance the position of SQS in the Insurance market Commenting on the results, Rudolf van Megen, CEO, said: "In the first six months of 2007, SQS made a giant leap forward to strengthenits position as the global leader in independent software testing and qualitymanagement services, with a strong focus on the European markets. Our market leadership is reflected in the high number of new client wins weachieved in the first half, helping SQS to achieve a growth rate almost fivetimes that of the overall European IT services market. Furthermore, our recent acquisition of Triton will enhance earnings in 2007 andopen up new cross-selling opportunities for our testing and consulting services. The second half of 2007 has begun strongly and with our new-business pipelinelooking very healthy, we expect to achieve full year results comfortably aheadof current market expectations. 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 0 Altium Securities +44 (0)20 7484 4040Nick Tulloch College Hill Associates Ltd +44 (0) 20 7457 2020Sara MusgraveCarl FranklinBen 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 having most of its business in Europe. SQS consultants design andoversee quality management processes during software and IT systems development,and test the resulting products for errors and omissions. Headquartered in Cologne, Germany, SQS now has 860 employees across Europe andin South Africa. The Group has a strong presence in Germany (Cologne, Munich,Frankfurt, Stuttgart and Hamburg) and in the UK (London, Woking, Birmingham,Manchester, Belfast), Ireland, Netherlands, Switzerland, Austria and SouthAfrica. SQS also has a minor stake in an operation in Portugal and a partnershipoperation in Spain. With more than 4,000 completed projects under its belt, SQS has a strongcustomer base including 36 FTSE-100 companies, half of the DAX 30 and nearly athird of the STOXX-50. It supports clients in a wide range of industries,including major corporations such as Zurich Group, Deutsche Telekom, Barclays,BP, Boots, Credit Suisse, Volkswagen, and DaimlerChrysler. Chief Executive's Statement Introduction I am pleased to present strong interim results for the first half of 2007, inwhich SQS achieved material improvements in revenues, margins and profits acrossthe Group. Turnover from operations rose by 78.5% to €56.2m (HY1 2006: €31.5m) whileunderlying adjusted profit before tax increased by 168.9% to €4.6m (HY1 2006:€1.7m). These improvements resulted from strong organic growth of nearly 25% andacquisitive growth of nearly 54% from the first-time impact of Cresta GroupLtd., which was consolidated in the second half of 2006. A favourable market environment, particularly in Germany and the UK, has allowedpricing increases in excess of volume growth resulting in profits growth attwice the rate of sales. We have continued to strengthen our client base and improve our revenues fromrepeat business. The total number of clients now stands at more than 400,following 64 new account wins in the period - compared with 100 across the wholeof 2006. We have secured additional long term contracts in key verticals such asfinancial services, telecommunications and logistics, with a number of contractsinvolving significant offshore delivery components. We have continued to invest in growth, increasing the number of staff - mainlyconsultants - by 130 to a total of 860. Although hiring new consultants hasimpacted our G&A costs with agency fees in the first half of the year, theimpact of the new consultants' initial training costs on gross margins could bemore than offset by improved pricing. Utilisation rates have remained stable,which with improved pricing, has helped to reinforce the gross margin. Dividend No dividend will be paid in respect of the 2007 interim results, but aspreviously announced, the Company proposes to pay an enhanced dividend for its2007 financial year which will incorporate both the return of capital for its2006 financial year and the dividend which the directors currently expect to beable to pay for the Company's 2007 financial year. Measures to reorganise thenet asset base to enable dividend payments have now been passed and the enhanceddividend will be paid following the announcement of its preliminary results forthe year ended 31 December 2007 and the AGM planned for May 2008. Business strategy Our strategy is to build upon our market position as the global leader inindependent software testing and quality management services, with a major focuson the European market. We aim to grow our business with long-term outsourcingcontracts and further investment into expanding markets such as managementconsulting and embedded systems. Furthermore we intend to strengthen ourposition in a number of key European markets and will continue to look activelyfor acquisitions to support and accelerate this strategy. The SQS Group strategy is centred on five strategic business areas, all of whichall contribute to market leadership as a service company and the resultingimprovements in shareholder value. They are: • Market Leadership: Extend leadership in independent qualitymanagement and testing by delivering added value to our customers in order tohelp them achieve their goals • Growth: Increase Group revenues significantly above the marketgrowth rate for IT services • Financial strength: Remain the strongest independent softwaretesting and quality-management services company in Europe • Employment: Extend and retain a strong base of skilled and highlymotivated employees • Technology Leadership: Spot and anticipate trends in business and ITwith respect to software quality management and utilise what we learn for thebenefit of our clients and shareholders Services and product lines As the largest independent provider of software quality management services wecontinuously develop our range of offerings. They are: • Professional services for business and IT: within its broad range ofsoftware testing and quality management services, SQS has enhanced its offeringsin the fields of management consulting for the business side (e.g. project andrisk management), code quality management, and outsourcing/offshoring • Tools, licences, and maintenance: SQS's specialist range of softwaretesting tools has been enhanced by successful market deployment of version 8.0of our SQS-Test Professional product, which works independently or alongsideproducts developed by other testing tool companies • IT training: the training business has been extended with two newcertification schemes being established (INTCCM for Configuration Management andIREB for Requirements Management); this will result in additional coursesincluding certification. ISTQB and ISEB courses were updated for the newversions of the syllabus • Conferences and events: The successful SQC conferences (Software andSystems Quality Conferences), held in Germany, the UK and in Switzerland, arethe largest quality management and software testing events in Europe. We plan toexpand these into Ireland in 2008. The media partnership with IDG, which wasstarted in 2006, has resulted in a higher number of delegates, exhibitors, andsponsors attending our conferences during the year Market drivers Software quality management and testing is a specialised segment of the ITservices market and therefore growth in the IT services market correlatesclosely with growth in software quality management and testing. Researchconducted by the European Information Technology Observatory ("EITO") showed theEuropean growth rate for IT services to be 5.3% in 2006, with 5.4% expected for2007. Market research on the software testing market commissioned by SQS and conductedby Coleman Parkes Research and PAC in the "SQS countries" in early 2007 revealedthat 77% of all IT decision makers acknowledge that software testing is anessential part of IT product development. Around 69% consider the independenceof the test team from the software development team to be as important and 57%agree that compliance and regulation is driving the need for more rigoroussoftware testing. 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 has led to an increased demand for outsourced softwaretesting as well as better quality management of embedded systems. The Board There have been no changes to our supervisory board and management board in thelast six months period. Employees On behalf of the board, I would like to thank all our employees for theircontribution, hard work, and excellent support during the year. I also welcomethe many new employees who have joined our company and bring their rich andvaried talents to help our company grow. I am confident that we have the bestteam in place to capitalise on the opportunities available and to enable us todeliver long term shareholder value. A stock option programme started in 2006 will be continued in the second half ofthis year in order to help SQS retain key employees and attract qualityindividuals into the business. Outlook During the year, SQS significantly strengthened its position as the world'slargest independent provider of quality management and testing services forsoftware development and once again accelerated its growth rate, which nowstands at close to five times the rate of growth in the European IT servicesmarket (1). In the second half of 2007, we will continue to grow the business organically,focusing on expanding growth markets such as outsourcing, offshoring andembedded systems, whilst consolidating our most recent acquisition with Tritonin the field of insurance management consulting. This acquisition enables SQS tolever its expertise into project management and consulting, at the same timeopening up a number of cross-selling opportunities for our core testing andquality-management services. We expect the Triton acquisition to be earningsenhancing in 2007. Trading has been encouraging in the first two months of the second half and asexpected, growth is well ahead of the comparable period last year. The newbusiness pipeline remains strong and at this stage we expect to achieve fullyear results comfortably ahead of current market expectations. Rudolf van MegenChief Executive Officer6th September 2007 Financial review Summary Geographically, we saw the strongest turnover growth in the United Kingdom,Ireland and South African business, where the top line grew by 406.7%, mainlydue to the first time consolidation of Cresta Group Ltd. which was acquiredshortly after the first half-year period ended in 2006. Germany also performed strongly with 29.0% of pure organic revenue growth andSwitzerland with a top-line growth rate of 19.4%. Germany Revenue in Germany was €26.1m (HY 2006: €20.3m), an increase of 29.0%. Thisrepresented 46% of the Group's total revenue compared with 64% in the priorperiod. We intensified our recruitment search in the first half of 2007 in orderto grow the local business in Germany significantly in the current year. Profitshave increased due to significant price improvements with utilisation remainingat a high level. During the first half, we secured key contract renewals withall our large clients. United Kingdom/Ireland/South Africa Markets and pricing in our UK based businesses continued to be strong. UK-basedrevenues were €22.5m (HY1 2006: €4.4m), an increase of 407% - representingaround 40% of the total Group revenues. Organic growth in this region was strongat nearly 25%, but revenue growth in the first half was flattered by thefirst-time consolidation of Cresta Group Ltd., which resulted in a like for likerate of growth that we will obviously not continue to enjoy in the second halfof 2007. Switzerland In Switzerland, revenues were €6.0m (HY1 2006: €5.0m), an increase of 19% andrepresenting 11% of the Group's total revenue. While a significant proportion ofrevenues were achieved using consultants from other SQS entities in 2006, thefirst half of 2007 marked the first period in which the majority of revenueswere billed by locally-employed consultants. SQS won additional clients in banking, insurance and established a new verticalin telecommunications in Switzerland. Furthermore, we continued to build ourrecently-launched "SQS Group Management Consulting" arm, which focuses onbridging the gap between customers' business and IT departments with our ownproject and risk management services. The recent acquisition of Triton, anAustrian company active in this field, will enhance our reputation and offeringin this arena. Other European Countries Our businesses in Austria and the Netherlands generated €1.7m (HY1 2006: €1.8m)which was a decrease of 8.0%, mainly due to increased usage of consultants inother SQS regions. Margins and profitability Gross profit improved by 91.0% to €19.4 m (HY1 2006: €10.2m). Adjusted profitbefore tax (adjusted to add back pro forma interests required to be shown underIFRS of €0.3m on future payment milestones to the Cresta sellers) was €4.6m (HY12006: €1.7m), up 168.9%. Profit in the first half was positively impacted by thefirst time consolidation of Cresta Group Ltd. and strongly improved grossmargins from better price levels in the UK and Germany. Adjusted earnings per share improved to €0.19 (HY1 2006: €0.10) (based on netincome increased by €0.5m on IFRS tax differences and €0.3m of pro formainterests but including actual profit taxes of €0.9m payable under local GAAP). Costs Administrative costs totalled €8.9m (HY1 2006: €4.7m) and represented 15.9% ofsales (HY1 2006: 15.0%). A small reduction in costs through centralisingadministration was offset by higher agency fees for recruitment, mainly inSwitzerland, leading to a small increase in costs as a percentage of sales. Sales & marketing costs were €3.9m and also increased relative to turnover (from6.7% to 7.0%) as SQS continues to invest in additional sales resources tosupport current and future organic growth. Research and development costs of€1.8m fell as a proportion of turnover (to 3.2% from 4.5%), as our investment intool and course development for our training products remains stable in absoluteterms, irrespective of the overall revenue growth. In total, overhead costsrelative to sales were reduced to 26.1% from 26.2% in HY1 2006. Taxation The Group tax charge of €1.4m has two components: one is tax on profits payableunder local GAAP of €0.9m; the other is the deferred tax and tax differencesthat SQS is required to show under IFRS of €0.5m. Due to tax breaks in Germanyunder local GAAP, SQS will pay only negligible taxes on profits in Germany,Austria and the Netherlands. For the full year, we expect an actual tax rate of 25% and a rate of 29% in2008. Cash Flow and Financing Cash flow from operating activities improved significantly to €3.8m comparedwith an outflow of €0.05m in the same period last year, mainly due to areduction of debtor days from 75 at the year end 2006 to 69 at the end of June2007. Cash flow from financing activities was neutral and included proceeds of €4.8mfrom the issue of share capital, which was offset by repayment of borrowings.Cash outflow from investment activities of €2.4m was mainly due to ongoinginvestments in capitalized R&D for testing tools and training (€1.4m), with afurther amount accounted for by the purchase of money market funds, which are acash equivalent. Foreign Exchange Approximately 49% of the Group's turnover is generated in Euros. For theconversion of the local currency into Euros, the official fixed exchange ratewas chosen. For the conversion of the balance sheet items from foreign currencyinto Euros, the official mean rate as at 30th June 2007 was used. The Group's exposure to foreign exchange risks is negligible as more than 90% ofthe business is billed and served locally. Amortisation Amortisation of goodwill is no longer carried out due to changes in IFRSaccounting rules. On account of the high amortisation of goodwill values inprevious years, their book values today lie considerably below the originalacquisition costs. As a result, no reduction in value was necessary as a resultof the impairment tests carried out in accordance with IAS 36. Balance sheet The balance sheet strengthened considerably during the period reflecting thepositive net income in the first half of the year and the 4.8m fund raising wemade in April this year. We further reduced our borrowings by €5.3m to €1.1m(HY1 2006: €6.4m) resulting in a net cash (including marketable securities)position of €3.5m (HY1 2007: •-6.1m net debt). Cash balances (includingmarketable securities) at the six months period end stood at €4.6m (HY1 2006:cash €0.3m). International Financial Reporting Standards (IFRS) The Interim Consolidated Financial Statements of SQS and its subsidiarycompanies ("SQS Group") are prepared in conformity with all IFRS Standards(International Financial Reporting Standards, formerly International AccountingStandards) and Interpretations of the IASB (International Accounting StandardsBoard) which are mandatory at 30 June 2007, whereas the interim reports arepublished in an abbreviated form according to IAS 34. The same accounting andvaluation method used for the 2006 annual Consolidated Financial Statements wasapplied. The Interim Consolidated Financial Statements have neither been auditednor reviewed. The SQS Group Consolidated Financial Statements for the six month period endedJune 30th 2007 were prepared in accordance with uniform accounting and valuationprinciples in Euros. Rene GawronChief Financial Officer6th September 2007 Consolidated Profit and Loss AccountSix months ended 30 June 2007 Six months ended Six months ended Year ended 31 30 June 2007 30 June 2006 December 2006• '000 (Notes) (unaudited) (unaudited) (audited) Revenue 56,214 31,499 78,933 Cost of sales (3) 36,801 21,337 51,997 Gross profit 19,413 10,162 26,936 General and administrative expenses (3) 8,943 4,719 12,185Sales and marketing expenses (3) 3,931 2,115 5,666Research and development expenses (3) 1,811 1,428 3,351 Profit before tax and financing result (EBIT) 4,728 1,900 5,734 Finance income 201 103Finance costs 636 768Net interest (4) (435) (199) (665) Profit before taxes (PBT) 4,293 1,701 5,069 Income tax (5) 1,369 604 383 Profit for the year 2,924 1,097 4,686 Attributable to:Equity shareholders 2,924 1,097 4,686Minority interests (14) 0 0 0 Consolidated profit for the year 2,924 1,097 4,686 Earnings per share, undiluted (•) (6) 0.16 0.07 0.28 Earnings per share, diluted (•) (6) 0.16 0.07 0.28 Adjusted earnings per share (•), for comparison (6) 0.19 0.10 0.28only Consolidated Balance SheetAs at 30 June 2007 (IFRS) 30 June 2007 30 June 2006 31 December 2006• '000 (Notes) (unaudited) (unaudited) (audited) Current assetsCash and cash equivalents (9) 3,578 265 2,565Marketable securities (9) 1,020 0 0Trade receivables 25,785 13,976 22,231Other receivables 1,290 5,228 1,058Work in progress 36 406 314Income tax receivables 94 330 264 31,803 20,205 26,432 Non-current assetsIntangible assets (7) 3,153 2,544 3,356Goodwill (7) 28,313 11,589 28,313Property, plant and equipment (8) 1,202 721 1,057Income tax receivable 1,464 0 1,426Deferred taxes 1,435 1,653 1,881 35,567 16,507 36,033 Total Assets 67,370 36,712 62,465 Current liabilitiesBank loans and overdrafts (10) 989 4,578 5,330Trade creditors 3,250 2,492 3,159Other provisions (12) 109 75 76Tax accruals 1,385 380 667Tax liabilities 3,110 1,421 2,745Other current liabilities (11) 16,270 5,260 15,553 25,113 14,206 27,530Non-Current liabilitiesBank loans (10) 109 1,822 465Other provisions (12) 112 126 112Pension provisions 316 325 294Deferred taxes 989 938 1,001Other non-current liabilities 6,575 0 6,564 8,101 3,211 8,436 Total Liabilities 33,214 17,417 35,966Shareholders' equity (13)Share capital 18,691 15,763 17,191Share premium 16,692 10,936 13,322Statutory reserves 53 53 53Other reserves (1,243) (905) (1,105)Retained earnings (37) (6,552) (2,962) 34,156 19,295 26,499 Minority interests (14) 0 0 0Total Equity 34,156 19,295 26,499 Equity and Liabilities 67,370 36,712 62,465 Consolidated Cash Flow StatementSix months ended 30 June 2007 (IFRS) Six months ended 30 Six months ended Year ended 31 June 2007 30 June 2006 December 2006• '000 (Notes) (unaudited) (unaudited) (audited) Net cash flow from operating activitiesProfit before taxes 4,292 1,701 5,069Add back forDepreciation and amortisation 1,474 1,017 2,772Profit (Loss) on the sale of fixed assets 0 25 -36Other non-cash income not affecting payments (100) 3 (1,356)Net interest income 449 96 705Operating profit before changes in the net 6,115 2,842 7,154current assetsIncrease in trade receivables andreceivables from partly completed contracts not (3,555) (2,543) (5,208)yet billedIncrease (Decrease) in work in progress, otherassetsand pre-paid expenses and deferred charges 47 -615 1,225Increase in trade creditors 91 648 325Increase in remaining accruals 1,116 116 556Increase (Decrease) in pension accruals 22 20 (11)Decrease (Increase) in other liabilities anddeferred income (77) (509) (1,043)Cash flow from operating activities 3,759 (41) 2,998Cash effect of foreign exchange rate movements (14) 103 (89)Interest payments (4) (216) (174) (492)Tax payments (138) (194) (841)Net cash flow from current business activities 3,391 -306 1,576 Cash flow from investment activitiesPurchase of intangible assets (1,009) (1,039) (2,874)Purchase of tangible assets (409) (117) (325)Proceeds from the disposal of subsidiaries 0 0 221Cashflows arising from business combinations 0 0 (4,463)Transfer into an notary trust account to 0 (4,366) 0purchase of sharesProceeds from the sale of tangible assets 0 0 60Sale/(Purchase) of marketable securities (1,020) 5,626 5,610available for saleForeign currency result (1) (103) 39Interest received (4) 28 78 63Net cash flow from investment activities (2,411) 79 (1,669) Cash flow from financing activitiesProceeds from the issue of share capital 4,817 0 0Costs for IPO (98) 0 0Repayment of finance loans (10) (4,686) (347) (2,506)Increase of finance loans (15) 0 0 4,325Redemption / termination of leasing contracts 0 0 0Net cash flow from financing activities 33 -347 1,819 Change in the level of funds affecting payments 1,013 -574 1,726Cash and cash equivalentsat the beginning of the period 2,565 839 839Cash and cash equivalentsat the end of the period 3,578 265 2,565 1. Summary of Significant Accounting Policies Basis of preparation The Interim Consolidated Financial Statements of SQS and its subsidiarycompanies ("SQS Group") are prepared in conformity with all IFRS Standards(International Financial Reporting Standards, formerly IAS = InternationalAccounting Standards) and Interpretations of the IASB (International AccountingStandards Board) which are mandatory at 30 June 2007, whereas the interimreports are published in an abbreviated form according to IAS 34. The sameaccounting and valuation method used for the 2006 annual Consolidated FinancialStatements was applied. The Interim Consolidated Financial Statements haveneither been audited nor reviewed. The Financial Information has been prepared on the historical cost basis.Further information about the Group's accounting principles and policies iscontained in the SQS Consolidated Financial Statement at 31st December 2006. TheFinancial Information is presented in Euros and amounts are rounded to thenearest thousand (• '000) 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. Basis of consolidation As at 30 June, the Company held interests in the share capital of more than 20 %of the following undertakings: Consolidated companies Country of Six month Six month Year ended incorporation ended 30 ended 30 31 December June 2007 June 2006 2006 Share of Share of Share of capital capital capital % % % SQS Group (UK) Limited UK 100.0 100.0 100.0(formerly SIM Group Limited), WokingSQS Group Limited (formely Cresta Group UK 100.0 - 100.0Limited), London, since 1 July 2006SQS Software Quality Systems (Ireland) Ireland 100.0 - 100.0Ltd., since 1 July 2006SQS Nederland BV, Zaltbommel The Netherlands 90.5 90.5 90.5SQS GesmbH, Vienna Austria 100.0 100.0 100.0SQS Software Quality Systems (Schweiz) AG, Switzerland 97.0 97.0 97.0Zug 3 % of the shares in SQS Software Quality Systems (Schweiz) AG are held forlegal reasons by members of the board of this entity in accordance with theinterests of SQS. Use of estimates The preparation of the Interim Financial Statements in compliance with theInternational Financial Reporting Standards requires the disclosure ofassumptions and estimates made by the management, which have an effect on theamount and the presentation of the assets and liabilities shown in the balancesheet, the income and expenditure as well as any contingent items. The actualresults may deviate from these estimates. The main estimates and judgements of the management of SQS refer to: • the useful life of intangible assets and property, plant and equipment, • the valuation of the liability from the Cresta purchase • deferred taxes on losses carried forward, • the valuation of pension assets and liabilities. 2. Segmental reporting The following tables present revenue and profit information regarding the SQSGroup's business segments for the interim period ended 30 June 2007 and 30 June2006 and for the year ended 31 December 2006. Six month ended 30 June 2007 Germany UK Switzerland Other Total(unaudited) based European business Countries • '000 • '000 • '000 • '000 • '000 Sales External sales 26,132 22,461 5,951 1,670 56,214 Internal sales between the 1,209 161 200 230 1,800 segments Result Segment result 2,064 2,235 466 (37) 4,728 Consolidation 0Financial result (435)Taxes on income (1,369)Result for the period 2,924Profit share of minority 0shareholdersResult of the Group for the 2,924period Six month ended 30 June 2006 Germany UK Switzerland Other Total(unaudited) based European business Countries • '000 • '000 • '000 • '000 • '000 Sales External sales 20,265 4,433 4,985 1,816 31,499 Internal sales between the 1,566 535 69 30 2,200segments Result Segment result 1,279 205 354 52 1,890 Consolidation 10Financial result (199)Taxes on income (604)Result for the period 1,097Profit share of minority 0shareholdersResult of the Group for the 1,097period Year ended 31 December 2006 Germany UK Switzerland Other Total(audited) based European business Countries • '000 • '000 • '000 • '000 • '000 Sales External sales 41,859 23,744 9,801 3,529 78,933 Internal sales between the 3,263 2,379 355 167 6,164segments Result Segment result 2,547 2,468 791 (72) 5,734 Consolidation 0Financial result (665)Taxes on income (383)Result for the period 4,686Profit share of minority 0shareholdersResult of the Group for the 4,686period 3. Expenses The Consolidated Income Statement presents expenses according to function.Additional information concerning the origin of these expenses, by type of cost,is provided below: Cost of material The cost of material in the interim period ended 30 June 2007 amounted to€7,334,000 (at mid-year 2006: • 3,552,000). Cost of material relates mainly tothe procurement of external services such as contract software engineers. Inaddition, certain project-related or internally used hardware and software isshown under cost of material. Employee benefits expenses Six month Six month Year ended 31 ended 30 June ended 30 June December 2006 2007 2006 (unaudited) (unaudited) (audited) • '000 • '000 • '000 Wages and salaries 28,356 15,647 38,604Social security contributions 3,596 2,172 5,376Expenses for retirement benefits 198 450 461 32,150 18,269 44,441 The expenses for retirement benefits include the change in pension accruals andother retirement provisions such as direct insurance and provident fund costs. Amortisation and depreciation Amortisation and depreciation charged in the interim period ended 30 June 2007amounted to €1,474,000 (at mid-year 2006: €1,016,000). Of this, €978,000 (atmid-year 2006: €803,000) was attributable to the amortisation of developmentcosts. 4. Financial result The financial result is comprised as follows: Six month Six month Year ended 31 ended 30 June ended 30 June December 2006 2007 2006 (audited) (unaudited) (unaudited) • '000 • '000 • '000 Interest income 66 78 63Exchange rate gains 12 6 40Total finance income 78 84 103Interest payable (515) (174) (768)Exchange rate gains / losses 2 (109) (0)Total finance costs (513) (283) (768) Financial result (435) (199) (665) Finance income results from fixed deposit investments and investments insecurities maturing in the short term which yield interest income, or securitiesnegotiable at short notice. Interest payable relates to interest on bankliabilities and liabilities from the Cresta purchase. Finance income andexpenses are stated after foreign exchange rate gains and losses. The interest income contains the interest income of €39,000 from increase in thepresent value of the corporation tax receivable in accordance with (S) 37 KStG(German corporation tax law). 5. Taxes on earnings The line item includes current tax expenses in the amount of €934,000 (previousinterim period: €172,000) and deferred tax expenses in the amount of €435,000(previous interim period: €432,000). Further information about the recognition and measurement of the income tax iscontained in the SQS Consolidated Financial Statements at 31 December 2006. 6. Earnings per share The earnings / (loss) per share presented in accordance with IAS 33 are shown inthe following table: Six month Six month Year ended 31 ended 30 June ended 30 June December 2006 2007 2006 (unaudited) (unaudited) (audited) Profit for the year attributable to equity 2,924 1,097 4,686shareholders, • '000Diluted profit for the year, • '000 2,924 1,097 4,686Weighted average number of shares in issue, 17,920,105 15,763,080 16,471,084undilutedWeighted average number of shares in issue, 18,614,683 15,815,880 16,683,328dilutedUndiluted profit per share, • 0.16 0.07 0.28Diluted profit per share, • 0.16 0.07 0.28Adjusted earnings per share (for comparison 0.19 0.10 0.28only), • Undiluted earnings per share are calculated by dividing the profit for the sixmonth period attributable to equity shareholders by the weighted average numberof shares in issue during the six month period ended 30 June 2007: 17,920,105(at mid-year 2006: 15,763,080). 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. Adjusted earnings per share were calculated by adding back deferred taxes andIFRS tax differences as well as interest on Cresta liabilities (previous yearIPO costs) to the profit, divided by the number of shares issued as at 30.6.2007(18,690,823 shares, previous year 15,763,080 shares). 7. Intangible assets The item is comprised as follows:Book values Six month Six month Year ended 31 ended 30 June ended 30 June December 2006 2007 2006 (unaudited) (unaudited) (audited) • '000 • '000 • '000 Goodwill 28,313 11,589 28,313Development costs 2,511 2,287 2,565Software 640 212 758Remaining intangible assets 2 45 33Intangible assets 31,466 14,133 31,669 Development costs were capitalised in the interim period ended 30 June 2007 inthe amount of • 922,000 (half-year 2006 €1,010,000) and amortised over a periodof 36 months, since the conditions under IAS 38 were fulfilled. The amortisation of development costs is contained 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. 8. Marketable securities and cash and cash equivalents Cash and cash equivalents comprise cash and credit balances at banks which canbe realised in the short term and which earn commercial rates of interest. The development of cash and cash equivalents is presented in the ConsolidatedCash Flow Statement. The portfolio of marketable securities of the SQS Group contains investments inmoney market funds. They are held available for sale. The valuation of the securities is made at the attributable current value on thebasis of the market rates at the balance sheet date. Changes in the attributablevalues are recorded directly in equity. 9. Bank loans, overdrafts and other loans The finance liabilities are comprised as follows: Six month Six month Year ended 31 ended 30 June ended 30 June December 2006 2007 2006 (unaudited) (unaudited) (audited) • '000 • '000 • '000 Bank loan and overdraft 989 4,578 5,330Current finance liabilities 989 4,578 5,330 Bank loans 109 1,822 465Non-current finance liabilities 109 1,822 465Total finance liabilities 1,098 6,400 5,795 Of these, secured 1,015 4,328 3,075 The current account liabilities exist both with SQS Software Quality Systems AGand its subsidiaries. For some subsidiaries bank overdraft agreements are inplace. The current account liabilities to bank are secured on the assets of the Companyand those of its subsidiary undertakings. The interest rate for the current bankloan is Euribor +1.25 %. As security for this bank loan, the shares in SQS Group(UK) Ltd. were pledged in a pool contract jointly for the lenders. Furthermore,under an assignment agreement all current and future trade receivables of SQSSoftware Quality Systems AG were assigned to Deutsche Bank AG. 10. Other liabilities The item is comprised as follows: Six month Six month Year ended 31 ended 30 June ended 30 June December 2006 2007 2006 (unaudited) (unaudited) (audited) • '000 • '000 • '000 Liabilities in regard to social security 641 360 716Personnel liabilities (leave, bonus claims) 5,860 3,501 5,620Obligations from Cresta purchase 10,921 0 10,661Remaining other liabilities 2,490 1,268 2,018Deferred income (9) 131 162Bonded loans 2,942 0 2,940 22,845 5,260 22,117 The remaining other liabilities comprise trade accruals and other items due inthe short term. SQS has liabilities from the Cresta purchase in total of €10,921,000. Thenon-current liability has an amount of €3,617,000. For further details see SQS Consolidated Financial Statement at 31st December2006. The bonded loan represents a nominal amount of €3,000,000. The loan payment wasreduced by a discount of €63,000. The discount is set off against the loan inaccordance with IAS 39.AG 65. The discount is resolved annually following IAS 39AG 65 and has a book value of €58,000. The interest rate is agreed with 6,93%p.a. The redemption is due in 2012. The Deutsche Bank AG acts as appointedpaying agent. The Deutsche Bank is entitled to assign the bond to a specialpurpose entity, a trustee thereof, a bank or an insurance company. The interestrate is linked to the rating of the SQS Group following a defined rating system.If the SQS Group improves the rating the interest rate will be decreased. If therating decreases below a certain bound the creditors have the right to terminatethe bonded loan immediately. 11. Other provisions Other provisions in the amount of €221,000 (31 December 2006: €188,000) includethe warranty costs in the amount of €63,000 (31 December 2006: €30,000) and thevacant property provision in the amount of €158,000 (31 December 2006 €158,000). 12. Equity SQS is listed on the AIM market in London and on the Open Market in Frankfurt(Main). Subscribed Capital The subscribed capital amounts to • 18,690,823 (at 31 December 2006: •17,190,823). It is divided into 18,690,823 (at 31 December 2006:17,190,823)individual registered shares with an arithmetical share in the share capital of1 • each. Each share entitles the holder to one right to vote. No preferenceshares have been issued. The capital is fully paid up. The movements in the issued share capital are as follows: Individual Nominal value shares Number • As at 30 June 2006 15,763,080 15,763,080Increase in capital against contribution in kind 1,427,743 1,427,743 In 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 contribution in cash 1,500,000 1,500,000 (Entry of 3 April 2007)As at 30 June 2007 18,690,823 18,690,823 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 this authorization on theincrease of the share capital from • 17,190,823 by • 1,500,000 to • 18,690,823by issuance of 1,500,000 new registered non-par value shares againstcontribution in cash. The Supervisory board has consented to this resolution.The capital increase was registered on the Commercial Register on 3 April 2007. Authorised capital As described above the management board resolved on 21 March 2007 using inaccordance with (S) 4.5 of the articles of association of SQS the authorizationon the increase of the share capital until 12 July 2010 by issuance of 1,500,000new registered non-par value shares against contribution in cash (AuthorizedCapital II). Thereafter, the authorised capital developed as follows: • '000As at 30 June 2006 7,882Usage of authorised capital I (1,428)As at 31 December 2006 6,454Usage of authorised capital II (1,500)As at 30 June 2007 4,954 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 €53,000 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, the party entitled had not exercised this right. 13. Minority Interests There is no change in this item compared to 30 June 2006. Up to 2003 losses applicable to the minority have exceeded the minority interestin the subsidiary's equity. In accordance with IAS 27.35 the excess and anyfurther losses applicable to the minority have been allocated against themajority interest. In the case that the subsidiary reports profits, such profitsare allocated to the majority interest until the minority's share of lossespreviously absorbed by the majority bas been recovered. In the interim periodended 30 June 2007 minority profits were allocated to the majority in the amountof €2,000 (half year 2006: €0). 14. Related party transactions Under IAS 24, related persons and related companies are persons and companieswho have the possibility of controlling another party or exercising significantinfluence over their finance or business policy. In the SQS Group, these are theManagement Board members as well as the members of the Supervisory Board, Mr.and Mrs. Bons and Mr. and Mrs. van Megen, by reason of their position asshareholders, as well as the real estate investment fund "S.T.O.L. ImmobilienVerwaltung GmbH & Co. KG", Cologne, and "Am Westhover Berg GbR mbH", Cologne. Details in individual shares Six month Six month Year ended 31 ended 30 June ended 30 June December 2006 2007 2006 (unaudited) (unaudited) (audited) Non-par shares Non-par shares Non-par sharesHeinz Bons, Member of Management Board 3,295,945 3,295,945 3,295,945Maria Helene Bons, nee Peters 932,544 932,544 932,544Rudolf van Megen, Member of Management Board 3,657,647 3,657,647 3,657,647Ilona van Megen, nee Rumsch 932,544 932,544 932,544Rene Gawron, Member of Management Board 2,289 2,289 2,289Supervisory Board 17,500 27,100 17,500Total 8,838,469 8,848,069 8,838,469 In detail, the following transactions have taken place with these persons andcompanies: The married couples Bons and van Megen receive dividends if these are paid andemoluments as shareholders of SQS. Mr. Bons and Mr. van Megen are ManagementBoard members. In addition, Mr. Bons administers on trust alone (in Germany) and jointly (inUK) with a senior executive of SQS Group (UK) Ltd a further 113,070 shares(half-year 2006: 113,070 shares) within the framework of the employeeparticipation programme. As a part of the remuneration for the Management Board activities, SQS hasgranted a pension commitment to two Management Board members. These pensionplans amount to €316,000 (half-year 2006: €325,000). Mr. Gawron holds a minority stake of one share in the Swiss subsidiary on trustfor SQS Software Quality Systems AG since his office as president of theadministrative board of this company makes this necessary under Swiss law. SQS uses property owned by the closed real estate investment fund "S.T.O.L.Immobilien Verwaltung GmbH & Co. KG", Cologne, and also the real estateinvestment fund "Am Westhover Berg GbR mbH", Cologne. The shares in the fund areheld by employees and also Management Board members of SQS AG. The contractualconditions of the lease of properties are compatible with normal marketconditions. The total expenses incurred under these contracts amounted in theinterim period to €651,000 (half year 2006: €647,000). The total emoluments of the Management Board members amounted in the interimperiod ended 30 June 2007 to €556,000 (half-year 2006: €484,000). The emolumentsof the Supervisory Board members amounted in total to €41,000 (half-year 2006:€41,000) of which €41,000 had not been paid by the end of the interim period. Members of the Management board held 37.2 % (half-year 2006: 44.1 %) of theshares in SQS as at 30 June 2007. 15. Proposed Dividend The General Meeting of 30 May 2007 resolved not to pay any dividend for thebusiness year 2006. 16. Post interim period events In August 2007 SQS acquired Triton Unternehmensberatung, a private Austriancompany specialising in IT consultancy services to the insurance industry, for atotal maximum consideration of €15.5 million. Trading since 1997, Tritonprovides IT consultancy services to insurance companies improving the automationof their back office processes within Germany, Austria and Switzerland. In the year 2006, Triton realised an adjusted profit before tax of €1.4 millionon turnover of €4.8 million, representing a net margin of 29%. The value of thenet operating assets to be acquired is approximately €0.5 million. Tritonengages approximately 35 permanent employees, is based in Vienna, Austria andhas one of the world's leading insurance companies, headquartered in Germany, asits predominant client. The acquisition comprises an initial consideration of €4.4 million in cash, anddeferred consideration of up to €11.1 million in total, to be paid in acombination of cash and shares (49% cash/51% shares). The deferred considerationis subject to Triton meeting specific earn out targets over the next two years,including profit after tax and revenue with additional customers. Triton hascommitted to an aggressive growth forecast in order to achieve the earn outtargets. In addition, there is a provision for the sellers to agree, at theirdiscretion, to a third year earn out with higher targets. Cologne, 05 September 2007SQS Software Quality Systems AG ______________________________ ______________________________ ______________________________ (H. Bons) (R. Gawron) (R. van Megen) 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