Preliminary Results

SQS Software Quality Systems AG

("SQS" or the "Company")

Results for the year ended 31 December 2015

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 2015.

Financial Highlights

· Total revenue increased by 19.5% to €320.7m (FY 2014: €268.5m)

o Organic revenue growth of 7.5%

· Adjusted* Gross profit increased by 12.8% to €101.0m (FY 2014: €89.6m)

· Adjusted** PBT increased by 11.0% to €20.8m (FY 2014: €18.8m)

· Adjusted*** EPS decreased by 2.4% to €0.40 (FY 2014: €0.41****)

o Due to higher tax rate and minority interests

· Operating cash inflow increased to €31.4m (FY 2014: €26.6m)

· Net debt as at 31 December 2015 at €5.9m (FY 2014: net cash €9.8m)

o Reflecting €22.4m cash outflow for investments in acquired companies and infrastructure expansion during the year

· Proposed dividend of €0.13 per share (FY 2014: €0.13 per share)

* adjusted for a non-cash amortisation of Bitmedia/Trissential acquired order backlog of €2.1m

** incl. effects under * and adjusted to add back €6.9m of IFRS amortisation of client relationship assets from the Bitmedia/Trissential acquisitions, €1.2m acquisition costs for Bitmedia, Trissential and Galmont and €0.4m pro forma interest arising from purchase price allocation for deferred payments on acquisitions

*** adjusted to add back effects under ** at actual local GAAP tax rate of 31.8%, less €1.9m on minority interests (mainly for SQS India BFSI)

**** originally published €0.43, after correction of minority interests it is now €0.41

Operational Highlights

· Continued diversification of vertical and regional split, augmented by three successfully integrated acquisitions

· Increased global market share, maintained strong position in Europe and gained momentum in territories with high growth potential such as the US

· Targeted acquisitions have facilitated significant progress in the US market place with run rate revenue c.18% of total revenue in this strategically important territory

· Group gross margins increased in H2 to 31.7% (H1 2015: 31.3%) with greater contribution from higher margin Managed Services ("MS") and Specialist Consultancy Services ("SCS") business lines, as well as stability in Regular Testing Services ("RTS")

· Full year gross margin was 31.5% (FY 2014: 33.4%); RTS gross margins reduced YoY in some larger client engagements; SQS has now disengaged from these

o SQS achieved its target to further reduce exposure to RTS to 31% of the Group's business, in line with its strategic goals

· Strong growth in MS and SCS divisions, which combined now account for nearly 60% of Group turnover, with MS revenue increasing to 48% of total revenue (FY 2014: 45%)

· Acquisitions supported growth in previously smaller verticals, including government & public sector, energy & utilities and pharma & healthcare

· Debtor days reduced to 69 (FY 2014: 72) reflecting typical full year strong cash conversion

Diederik Vos, Chief Executive Officer of SQS, commented: 

"The second half of 2015 has seen SQS strengthen its foothold in key territories and verticals, as well as maintaining its strong position in traditional markets. Despite the challenging global macro-economic backdrop and challenges for some of our clients, which we anticipate will continue over the coming year, it is pleasing to see SQS grow its business by nearly 20% year-on-year.

"Nearly 60% of SQS's revenues now come from the higher margin business lines of Managed Services and Specialist Consultancy Services. Although Regular Testing Services remains a lower margin business, we believe the profit margin is showing stability and, more importantly, RTS continues to offer a number of cross-selling opportunities into the MS and SCS divisions.

"Our traditional markets remain strong and we have successfully grown our US presence. At the same time we have rationalised our portfolio, especially in RTS, and have developed our core verticals: BFSI (incl. Fintech), Manufacturing & Automotive as well as progressing our internal industrialisation initiative - which further increases our competitive advantage. We are now better placed than ever before to provide quality assurance from an end-to-end process perspective.

"We enter 2016 with cautious optimism, and look forward to another year of progress. The US will be a key geography and our recent acquisitions enable us to take full advantage of the opportunities in this high potential market. Our focus over the next six to twelve months is to continue integrating our acquisitions and leverage these to support our growth across our three divisions."

Enquiries:

About SQS

SQS is the world's leading specialist in software quality services. This position stems from over 30 years of successful consultancy operations. SQS consultants provide solutions for all aspects of quality throughout the whole software product lifecycle driven by a standardised methodology, offshore automation processes and deep domain knowledge in various industries. Headquartered in Cologne, Germany, the company now employs approximately 4,600 staff. SQS has offices in Germany, UK, US, Australia, Austria, Egypt, Finland, France, India, Ireland, Italy, Malaysia, the Netherlands, Norway, Singapore, South Africa, Sweden, Switzerland and UAE. In addition, SQS maintains a minority stake in a company in Portugal. In 2015, SQS has generated revenues of €320.7 million.

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

With over 10,000 completed projects under its belt, SQS has a strong client base, including half of the DAX 30, nearly a third of the STOXX 50 and 20 per cent of the FTSE 100 companies. These include, among others, Allianz, BP, Commerzbank, Daimler, Deutsche Post, Generali, Meteor, UBS and Volkswagen as well as other companies from the six key industries on which SQS is focused.

For more information, see www.sqs.com

Chief Executive's Statement

Introduction

During the financial year SQS delivered on its strategy to diversify its revenue base both by geography and by end market vertical, as well as continuing to grow the Managed Services (MS) and Specialist Consultancy Services (SCS) business lines. This was successfully achieved organically, and further amplified by three acquisitions, all of which leave the Company with a solid platform to continue to grow in line with the market in the next 12 months.

Recent research has valued the addressable market at $15bn with more evidence suggesting the increasing significance of quality services for business critical end-to-end processes. This is a key area of differentiation for SQS as it solves quality issues for the entire business process, not just for software applications in isolation. As more enterprises address their need for digital transformation, a key trend in IT now and for the future, the need for SQS's services is expected to keep growing.

As part of the shift during the course of 2015, SQS's highest margin business line, Managed Services, has grown by 27.1% to become nearly half of total revenues at €153.2m (FY 2014: €120.5m). The majority of growth was organic, therefore demonstrating we are growing strongly in this segment.

Specialist Consultancy Services revenue increased by 77% to €36.6m (FY 2014: €20.7m) to account for approximately 11% of total sales (FY 2014: 8%). Growth was largely driven by the first time contribution from the Trissential acquisition in the US. Going forward we expect additional growth from the project management and business analyst practices also built up in other territories outside the US.

Regular Testing Services revenue declined by 2.7% to €99.3m (FY 2014: €102.1m), as we managed down a number of lower margin customers. RTS accounted for 31% of total revenues (FY 2014: 38%), and it is anticipated that this will continue to stay at around 30% during 2016. Although margins are expected to remain depressed, the opportunity to cross-sell is important, and illustrated by the fact that RTS has produced the vast majority of the current MS customer base.

Other revenue sources accounted for 10% of total revenue.

Overall, our revenue mix will be geographically more diversified in 2016. Acquisitions made in recent years have reduced the proportion of revenues from traditional European markets such as Germany and the UK, and expanded SQS into newer territories, like the US, Italy and Benelux. In India, we have appointed a new head of operations to drive more efficiency and output from our employee base, in line with our strategic goal to increase industrialisation levels.

Given its importance within the testing market allied with the expectation that the US will grow at a faster rate than the global market, expansion in this territory was a key strategic target for SQS. Organic growth rate in the US business was 35% (17% in constant currency) in 2015. Through the acquisitions of Trissential and Galmont, the Company created a combined annual revenue run rate of approximately €60m across the US, generating a run rate of c.18% of total revenues. We were pleased to have completed two significant acquisitions which are being successfully integrated and are already delivering new opportunities and driving growth in the US. We believe that our US business has the potential to achieve revenues of more than €100m per annum without additional acquisitions.

New Business

Software and digitalised systems are increasingly becoming the backbone of business - no matter the sector and no matter the geography in which a business operates. Whilst that is not a new trend, the importance of these systems to the actual operations, revenue and reputation of large businesses - particularly in regulated industries - has grown significantly in recent years. The services these businesses provide - and the customer experience they offer - are dependent upon the integrity of the systems that are used. As a consequence, and with digitalisation and the convergence of engineering, hardware and the internet of things increasingly on the 'to-do' list of Boards and management teams, the relevance of SQS' offer remains strong. Software systems must work; there is financial and reputational risk if failure occurs and businesses are therefore increasingly focused on taking a long-term view of how best to ensure the integrity of their systems.

These trends have helped SQS to enjoy a productive year in winning high profile clients, and securing strategically important customers in high growth verticals. Banking & Financial Services has shown growth in absolute terms with encouraging new business wins, and over the last 12 months SQS has also seen pockets of growth in new areas such as government & public, energy & utilities, as well as pharma & healthcare.

As a result of our increased operations in the US, SQS secured some notable client wins, including a large healthcare provider; a two year MS deal with a major computer software re-seller; a long-term software testing engagement with a large financial services company; a global delivery engagement for the energy division of one of the world's largest industrial conglomerates; and added offshore delivery to its leading US hospitality chain client.

In Europe, the Company gained an electronics client working in the defence sector on a long-term "Internet of Things" engagement and also started a new global delivery contract with a leading retail bank operating across the Spanish speaking world.

Market & Industry Overview

According to its most recent reports published in January and February 2016, NelsonHall predicted 2% growth in overall IT services spending in 2016, reflecting the impact of declining oil prices and China's GDP growth moderation. This modest growth will be driven by project services, while IT outsourcing is expected to grow 1% with maintenance down by 1%. Digital transformation services, however, will drive growth (up 18%) along with software testing and quality services, which are projected to grow 8-9% in 2016 - both of which should benefit SQS.

In terms of geographic trends, NelsonHall predicted a steady US performance year-on-year (despite the upcoming election), Europe returning back to growth, and continued uncertainty in BRIC markets (excluding India). This corresponds with some of the trends that SQS experienced in the last year, with a notable slowdown in Europe - which was relatively flat and showing limited growth - whilst the US was showing high growth potential, particularly in areas such as healthcare as a result of Obamacare.

Acquisitions

SQS made three strategically important acquisitions during 2015, which have helped position the Company for growth in 2016. The acquisition of 90% of the issued share capital in Bitmedia provided entry into the Italian market. Trissential was acquired in April for up to $30.7m with the aim to support the service portfolio diversification strategy within software and IT quality services. The deal also served to enhance exposure to the significant US market opportunity. The footprint provided by Trissential was improved by the complementary acquisition of Galmont in September. Given the timing of the acquisition, the expected benefits and scale of operations in the US will only be fully reflected in the 2016 full year financials.

The initial integration of the acquisitions in terms of sharing resources and growing a cross-selling pipeline has been successful, with tangible results seen during H2 2015. It is anticipated that the Company will seek to finalise the full integration of these assets before considering additional M&A activity.

Strategy

During the financial year SQS had a clear strategy which was focussed on delivering higher margin Managed Services and developing the Company's global presence, especially in the important US market where it sees huge growth potential. Based on last year's achievements, SQS starts the new financial year in a good position for outperformance versus the industry despite well documented global macro challenges. We are also pleased with our solid performance in SCS and continue to see opportunities from RTS through further cross-selling.

Looking ahead to 2016, SQS will look to leverage its strengthened position in the US, taking market share in the process, while seeking to grow the higher margin business lines of MS and SCS. With Europe expected to remain relatively flat, showing minimal growth in the coming months, SQS will continue to increase its exposure to high performing growth countries, with the US in particular a huge opportunity for the Company to gain market share. SQS will continue to focus on increasing its key verticals, backed by a robust financial position of strong cash flow conversion and an expected reduction of net debt.

In a market increasingly driven by digital transformation services, SQS is well positioned as the leading specialist in end-to-end business process software quality assurance.

Dividend

SQS proposes to pay a dividend for the full year of €0.13 per share (2014: €0.13). This is in line with the previously stated policy to pay a dividend of about 30% of adj. PAT and EPS. Subject to shareholder approval the dividend will be paid following the AGM (planned for 25 May 2016) with a pay date/post cheques date of 27 May 2016. The record date will be 13 May 2016 and the ex-dividend date 12 May 2016. In accordance with German law, SQS pays one dividend in each financial year.

Employees

Total headcount at the period end had increased 19% to 4,619 (31 December 2014: 3,875) with a further circa 250 contractors retained during the period. This increase includes additional headcount from acquired companies, namely Bitmedia with 159, Trissential with 161 and Galmont with 116.

Outlook

The second half of 2015 has seen SQS strengthen its foothold in key territories and verticals, as well as maintaining its strong position in traditional markets. Despite the challenging global macro-economic backdrop and challenges for some of our clients, which we anticipate will continue over the coming year, it is pleasing to see SQS grow its business by nearly 20% year-on-year.

Nearly 60% of SQS's revenues now come from the higher margin business lines of Managed Services and Specialist Consultancy Services. Although Regular Testing Services remains a lower margin business, we believe the profit margin is showing stability and, more importantly, RTS continues to offer a number of cross-selling opportunities into the MS and SCS divisions.

Our traditional markets remain strong and we have successfully grown our US presence. At the same time we have rationalised our portfolio, especially in RTS, and have developed our core verticals: BFSI (incl. Fintech), Manufacturing & Automotive as well as progressing our internal industrialisation initiative - which further increases our competitive advantage. We are now better placed than ever before to provide quality assurance from an end-to-end process perspective.

We enter 2016 with cautious optimism, and look forward to another year of progress. The US will be a key geography and our recent acquisitions enable us to take full advantage of the opportunities in this high potential market. Our focus over the next six to twelve months is to continue integrating our acquisitions and leverage these to support our growth across our three divisions.

Diederik Vos

Chief Executive Officer

8 March 2016

Financial Review

Summary

Revenues grew by 19.5% to €320.7m (FY 2014: €268.5m), including a first time consolidation effect for the full period from new acquisitions Bitmedia (now SQS Italy, consolidated since February 2015) of €10.7m, Trissential (US, consolidated since June 2015) of €17.1m and Galmont (US, consolidated since September 2015) of €4.2m. Bitmedia contributes mainly to the Managed Services business unit, Trissential predominantly to Specialist Consultancy Services and Galmont mainly to Regular Testing Services. Organic revenue growth without these new acquisitions was 7.5% compared to FY 2014. At the prior year's exchange rates, organic growth would have been 2.6%, reflecting the strengthening of non Euro currencies during the period.

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 delivery 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 specialised projects with skills like SAP, PLM (Product Lifecycle Management), IT Project and Programme 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 summarised as "Other".

Breakdown by Business Unit

Managed Services (MS)

Revenue in MS, our largest segment and our key strategic focus, amounted to €153.2m in the period (FY 2014: €120.5m), an increase of 27.1% on the prior year, representing a group revenue contribution of 48%. The increase in revenue predominantly came from the extension of existing long term managed services contracts.

Specialist Consultancy Services (SCS)

Our business in this segment saw a strong increase during the period of 77% to €36.6m (FY 2014: €20.7m), representing a group revenue contribution of 11%. Growth for this segment was mainly driven by the acquisition of Trissential.

Regular Testing Services (RTS)

Revenue in this segment came down by -2.7% to €99.3m (FY 2014: €102.1m) on the prior year period, representing a group revenue contribution of 31%. Our strategy continues to be to reduce the share of this segment to below 30% of our total revenue, which is evidenced by the drop of this segment's share of total revenue from 38% in FY 2014 to 31% now.

Other

Revenue in the "Other" segment amounted to €31.6m in the period (FY 2014: €25.2m), an increase of 25.4% on the prior year and representing 10% of group revenue. An increase in revenue from contractors was the key driver of this performance.

Margins and Profitability

Adjusted* gross profit improved by 12.8% to €101.0m (FY 2014: €89.6m), with the gross margin at 31.5% (FY 2014: 33.4%). This change in the gross margin was mainly influenced by a lower gross margin from RTS with 26.5% (FY 2014: 32.3%) due to a growing commoditisation and competitive pressure in this market resulting in lower staff utilisation rates, particularly in the UK and Germany. However, positively gross margins in MS held up at 36.5% (FY 2014: 36.8%) due to progress in global delivery and industrialisation; and SCS margins were at 34.1% (FY 2014: 35.2%) reflecting the first time consolidation of the Trissential acquisition.

Gross margins in the "Other" segment stayed at 19.8% (FY 2014: 19.7%) as we slightly increased margins from our contractor business.

Adjusted** profit before tax for the period was €20.8m (FY 2014: €18.8m), an increase of 11.0%, with the adjusted profit margin at 6.5% (FY 2014: 7.0%). The profit before taxes was impacted by the lower gross margin from RTS, only partially offset by lower overhead costs.

Adjusted*** earnings per share are at €0.40 (FY 2014: €0.41****) due to a higher tax rate under local GAAP and higher minority interests.

* adjusted for a non-cash amortisation of Bitmedia/Trissential acquired order backlog of €2.1m

** incl. effects under * and adjusted to add back €6.9m of IFRS amortisation of client relationship assets from the Bitmedia/Trissential acquisitions, €1.2m acquisition costs for Bitmedia, Trissential and Galmont and €0.4m pro forma interest arising from purchase price allocation for deferred payments on acquisitions

*** adjusted to add back effects under ** at actual local GAAP tax rate of 31.8%, less €1.9m on minority interests (mainly for SQS India BFSI)

**** originally published €0.43, after correction of minority interests it is now €0.41

Costs

Total overhead costs (adjusted for effects under ** above) came down to 24.7% of revenue from 26.0% in 2014.

General & Administrative expenses (adjusted for effects under ** above) for the period were €52.4m (FY 2014: €45.3m). This represents a decrease by 0.6 percentage points to 16.3% of revenue (FY 2014: 16.9%). The absolute growth was mainly due to the first time consolidation effects of the acquisitions (€5.6m) and on-going investment in the build out of the US business (€0.7m).

Sales & Marketing costs for the period were €22.9m (FY 2014: €20.7m), representing 7.1% of revenues (FY 2014: 7.7%). The 0.6% decrease as a percentage of revenues was due to improved efficiencies in the sales teams.

Research & Development expense during the period was slightly up at €4.0m (FY 2014: €3.8m) representing 1.2% (FY 2014: 1.4%) of revenues. Research & development investment was mainly focused on the development of our proprietary software testing tools and the PractiQ methodology.

Cash Flow and Financing

Cash flow from operating activities was €31.4m (FY 2014: €26.6m). The strong full year operating cash flow results from a typical seasonality we have seen in all previous years with strong EBITDA to cash conversion of 110% particularly in the second half period. Debtor days came down to 69 (FY 2014: 72) resulting from reduced debtor days in some operations like SQS India BFSI which previously had substantially higher receivable days than the SQS Group average.

Cash outflow from investments was up to €29.8m (FY 2014: €0.045m inflow), mainly due to the acquisitions of Bitmedia, Trissential and Galmont resulting in an outflow of €18.0m and an ongoing investment into the third phase of the building for our offshore delivery centre in Pune (India), which officially opened post the period in January 2016. The latter increased the cash outflow for fixed and intangible assets by net €4.4m to €12.4m (FY 2014: €8.0m outflow).

Total cash inflow from financing activities was €12.2m (FY 2014: €8.8m outflow) reflecting a net increase of finance loans to €18.5m YoY to fund the above mentioned investments for acquisitions and the Pune test centre infrastructure. Additionally dividend payments to SQS and minority shareholders resulted in an outflow of €6.0m (FY 2014: 3.4m).

Balance Sheet

We closed the period with €32.0m (31 Dec 2014: €26.3m) of cash and cash equivalents on the balance sheet and borrowings of €37.9m (31 Dec 2014: €16.5m). The increase in borrowings was mainly due to the cash outflow for acquired companies and the Pune test centre infrastructure. Cash reserves are increasingly held in a higher diversity of currencies and transfer of funds is restricted in some geographies like India. Therefore offset between cash and debt positions has become less flexible as we also seek to exclude the realisation of negative exchange rate movements. The resulting net debt position at the period end was €5.9m (31 Dec 2014: net cash of €9.8m).

The final purchase price allocation with regard to the Galmont acquisition (completed in August 2016) is still pending. Therefore the full amounts for acquired net assets for Galmont (€15.0m) have been posted as "goodwill" and will be allocated to intangible assets and goodwill once the purchase price allocation has been finalised in H1 2016.

For SQS India BFSI, Bitmedia and Trissential intangible assets for client relationships and order backlog with a fair value of €17.9m were recognised in the 31 Dec 2015 balance sheet, reflecting a further amortisation of €8.9m during the period. On average these intangible assets are amortised over a period of up to nine years.

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

Taxation

The tax charge of €3.0m (FY 2014: €3.3m) includes current tax expenses of €6.6m (FY 2014: €5.0m) and deferred tax expenses of €(3.6)m (FY 2014: €(1.7)m). The tax rate on local GAAP results was 31.8% (FY 2014: 26.4%), the higher tax rate being a consequence of a geographic spread of profits. Going forward, we expect an actual tax rate of c. 31%.

Foreign Exchange

Approximately 56.5% (FY 2014: 56.0%) of the Group's turnover is generated in Euros. For the conversion of revenues and costs generated in local currencies into Euros, the relevant official average exchange rate for the twelve-month-period of 2015 was chosen. For the conversion of the balance sheet items from local currency into Euros, the official exchange rate as at 31 December 2015 was used.

Foreign exchange had a €0.3m positive 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 2014, our non-Euro revenues for the period would have been €12.9m lower and the EBIT would have only been €0.3m lower. These translational exchange rate movements helped to fully offset the negative margin impact we had from Eurozone revenues with Indian and Egyptian resource costs due to the weakening of the Euro against these currencies in the period. Thus the net profit impact of forex was almost nil. Even in a volatile macro economic environment, SQS does not anticipate any significant impact to its bottom line from forex movements.

International Financial Reporting Standards (IFRS)

The Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group") are prepared in conformity with all IFRS (International Financial Reporting Standards) and Interpretations of the IASB (International Accounting Standards Board) which are to be applied for those financial statements whose reporting period starts on or after 1 January 2015.

The SQS Group Consolidated Financial Statements for the 12 month period ended 31 Dec 2015 were prepared in accordance with uniform accounting and valuation principles in Euros.

Rene Gawron

Chief Financial Officer

8 March 2016

Consolidated Income Statement

for the year ended 31 December 2015 (IFRS)

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2015 (IFRS)

Consolidated Statement of Financial Position

as at 31 December 2015 (IFRS)

Consolidated Statement of Cash Flows

for the year ended 31 December 2015 (IFRS)

Consolidated Statement of Changes in Equity

for the year ended 31 December 2015 (IFRS)

Notes to the Consolidated Financial Statements

at 31 December 2015

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 4,619 employees at the end of 2015 (previous year 3,875 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, Italy, the Netherlands, Norway, South Africa, Sweden, Switzerland, Singapore, Australia, Malaysia, Belgium, the United Arabian Emirates and the United States of America. Furthermore, SQS has a minor stake in an operation in Portugal.

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 2015.

The Financial Information has been prepared on a historical cost basis. The Financial Information is presented in Euros and amounts are rounded to the nearest thousand (€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 2015.

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 2015:

Improvements projects 2010 - 2012 and 2011 - 2013 regarding several improvements of existing standards.

The amendments and improvements did not have any impact on the consolidated financial statements of SQS Group.

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 2016 or later periods, but the group has not early adopted them:

Annual Improvements to IFRSs 2012-2014

Except from IFRS 15 and IFRS 16 none of these standards and amendments is likely to 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 SQS Group and cease to be consolidated from the date on which control is transferred out of SQS Group. In general SQS obtains and exercises control through voting rights.

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

As at 31 December 2015, 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 2014: € 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 Arabian Emirates. None of these companies has a significant 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. The items of the income statement of these entities were translated at the weighted average exchange rate for the year 2015. 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 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 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 specialised projects with skills such as 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 business activities there is the business with contractors (as far as these have not been included in MS), training & conferences and software testing tools. Each of these minor operating segments represents less than 10% of the Group's revenues and the Group's profit. Thus, all these other segments are presented as "Other".

The group management board consisting of CEO (Chief Executive Officer), CFO (Chief Financial Officer) and COO (Chief Operations Officer) monitors the results of the operating segments separately in order to allocate resources and to assess the performance of each segment. Segment performance is evaluated based on gross profit.

Non-profit centres represent important functions such as 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 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 2015 and 2014.

In 2015, 11% of the SQS Group´s revenue have been generated by one customer.

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. and SQS Italia. These puttable instruments include contractual obligations for SQS AG to purchase the outstanding shares of these entities. SQS group assesses and presents these obligations as financial liabilities at fair value. Consequently the consolidated financial statements of SQS do not show any non-controlling interests regarding SQS India Infosystems Pvt. Ltd. and SQS Italia.

5. Business combinations and acquisition of non-controlling interests

In the reporting period SQS Group acquired the shares of SQS Italia, Trissential and Galmont.

SQS Italia

With effect from 1 February 2015 SQS acquired 90% of the voting rights and shares of SQS Italia (SQS Italia SpA, formerly Bit Media SpA), for a cash consideration of €6.07m. The Managing Director of SQS Italia has retained 10% of the shares and stays with SQS as Managing Director of SQS Italia. With regard to the remaining 10% of shares, the parties have agreed a call option in favour of SQS and a put option in favour of the vendor. Any party may exercise its respective option at any time between the 3rd and 5th anniversary of completion of the acquisition. The value of the remaining shares will be determined with reference to Bit Media's latest audited profit after tax at that time.

SQS Italia is based in Rome. The acquisition of SQS Italia gives SQS entry into the Italian market, and provides a solid and substantial platform from which to strengthen our service to the existing Italian customers of SQS Italia and to expand further into the region through the cross-selling of services. SQS Italia had been focused on the public sector. In addition, SQS expects to develop the Banking, Financial Services and Insurance ("BFSI") business. There are also a number of synergies across the two organisations that may result in cost savings and improved efficiencies including providing the existing SQS Italia business with access to SQS's lower cost offshore testing resources.

The acquisition has been accounted for using the acquisition method at the acquisition date of 1 February 2015. With regard to the put option SQS Group accounted for 100% of the shares of SQS Italia.

Trissential

With effect from 1 June 2015 SQS Group acquired the entire voting rights and the entire issued share capital of Trissential LLC, Wisconsin USA (Trissential) for a maximum consideration of US$30.7m. The purchase price is partly due in cash and partly in new SQS shares. The purchase price comprises an initial consideration, a deferral consideration and an earn-out payment. As initial consideration SQS has paid to the vendors of Trissential a cash component of US$11m and a share component comprising 737,804 new Ordinary SQS shares, equating to US$6.9m. A deferral consideration of US$3m will be payable, subject to any indemnity claims, by 330.361 SQS shares, within a period between 18 and 24 months from the acquisition date. Further an earn-out consideration to be satisfied both, in cash and SQS shares of up to US$10m, will be payable, subject to the achievement of performance-related targets over the next three years.

Trissential is a leading IT project, programme and portfolio management consultancy in the Mid-West region of the United States, with a presence in Minneapolis, Milwaukee and Chicago. Trissential operates across four principal sectors, with a strong alignment to SQS's existing strength in manufacturing, while adding significant expertise in retail, energy and healthcare. The Acquisition provides SQS with a substantial and stable revenue platform, supporting SQS's strategy of diversifying its geographic revenue split by materially enhancing its operations in the US.

The acquisition has been accounted for using the acquisition method at the acquisition date of 1 June 2015.

Galmont

With effect from 1 September 2015 SQS Group acquired the entire voting rights and the entire issued share capital of Galmont Consulting LLC, Chicago USA (Galmont) for a maximum consideration of US$22m. The purchase price is partly due in cash and partly in new SQS shares. Pursuant to the terms of the Acquisition, SQS has paid the vendors of Galmont a cash component of the initial consideration of US$3.5m. The share component of the initial consideration comprising 375,134 new Ordinary SQS-shares, equating to US$3.5m, were issued. Further an earn-out consideration of up to US$15m will be payable dependent on the performance of Galmont within the next three years. 50 percent of the earn-out will be paid in cash and 50 percent will be satisfied in SQS shares.

Galmont is a leading software testing consultancy in the Mid-West region of the US, with a presence in Chicago, Dallas, New York and Kentucky. Galmont complements SQS's existing strength across the Banking, Financial Services and Insurance ('BFSI') and Manufacturing sectors and brings significant new expertise in government and healthcare. The Acquisition provides SQS with a substantial revenue base, supporting SQS's stated strategy of diversifying its geographic revenue sources by materially enhancing its operations in the US. Importantly, the Acquisition also complements SQS's existing onsite delivery capability in the US by providing an established and growing nearshore delivery centre in Lexington, Kentucky.

The acquisition has been accounted for using the acquisition method at the acquisition date of 1 September 2015.

Assets acquired and liabilities acquired

The fair value of the identifiable assets and liabilities of SQS Italia and Trissential LLC at the acquisition date were determined as follows, whereas the purchase price allocation regarding Galmont is not yet final: