10th Mar 2009 07:00
Embargoed until 7am
10 March 2009
SQS Software Quality Systems AG
("SQS" or "the Company")
Preliminary results for the twelve months ended 31 December 2008
SQS Software Quality Systems AG (AIM:SQS.L), the global leader in independent software testing and quality management services, today announces its preliminary results for the year ended 31 December 2008.
Financial Highlights:
Turnover up by 18% to €142.9m (2007: €121.1m) almost 5x the growth rate of the European IT services market*. This was achieved despite movements in currency exchange rates negatively impacting revenues by €7.2m during the year.
Gross profit up 19% to €49.6m (2007: €41.8m) with gross margin increasing to 34.7% (2007: 34.5%)
Adjusted profit before tax** up by 26% to €13.1m (2007: €10.5m) with profit margin improving to 9.2% (2007: 8.6%)
Adjusted earnings per share*** grew by 5% to €0.43 (2007: €0.41)
Cash inflow from business activities improved by 11% to €12.6m (2007: €11.4m) resulting in a year end net cash position of €5.1m
Dividend of €0.11 per share proposed (2007: double two year dividend of €0.20 per share)
*According to an IDC market study from 2008, European IT Services grew 4% in 2008.
**adjusted in accordance with IFRS to add back pro forma interest on deferred payment milestones for acquisitions of €0.7m, amortisation on intangible assets of acquired companies of €1.1m and exceptional costs relating to starting up the new offshore centre in Egypt of €0.4m. ***based on adjusted profit before tax less the actual tax rate for operations of 26.7%. The tax difference between reported and adjusted taxes is €0.6m which is a balance of deferred taxes under IFRS and taxes on dividend payments between SQS group companies.
Operational Highlights:
High levels of demand for blended onsite/off-shore solutions resulted in additional long-term contracts (duration over 12 months) now representing 14% of revenue (2007: 11%)
Record number of 175 new client wins signed during the year (2007: 155)
Recognition of 'Independent Software Testing' as a sector in its own right from numerous sources including Forrester and Gartner
Reduced exposure to specific industries through expansion into new or less traditional markets, such that SQS now sells into 27 distinct verticals
Two acquisitions made, expanding the European presence into the Nordic countries and the offshore operations into India
Staff numbers grew from 1012 to 1436 during the period, primarily to increase resources in both off-shoring and sales, enabling SQS to continue to gain market share
Commenting on the results, Rudolf van Megen, CEO, said:
"I am very pleased to report that we have grown at a rate of almost five times that of the European IT services market during 2008*, despite the downturn in the global economy and the negative effects of currency exchange rates when consolidating our UK business. In so doing, we have continued to increase our share of the independent software testing market and further extended our position as global leader. Acquisitions made over the year have expanded SQS's geographical presence and substantially improved our off-shore capability - something that has been particularly well-timed, given that businesses are increasingly looking to reduce costs in reaction to the global economic downturn."
"We are expecting a similar healthy performance for the first quarter of 2009, and, as such, are looking forward to the remainder of the year with a significant degree of confidence."
Enquiries:
|
SQS Software Quality Systems AG |
Tel. +49 (2203) 91 54 0 |
|
Rudolf van Megen, Chief Executive Officer |
|
|
Rene Gawron, Chief Financial Officer |
|
|
Altium |
Tel. +44 (0)20 7484 4040 |
|
Tim Richardson |
|
|
ICIS Limited |
Tel. +44 (0)20 7651 8688 |
|
Tom Moriarty |
|
|
Bob Huxford |
About SQS
SQS is the global leader in independent software testing and quality management services. SQS consultants design and oversee 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 more than 1,400 employees across Europe, Asia, North America and Africa. The Group has a strong presence in Germany (Cologne, Munich, Frankfurt, Stuttgart, Goerlitz and Hamburg) and in the UK (London, Woking, Birmingham, Manchester, Belfast), Ireland, the Netherlands, Switzerland, Austria, Sweden, Norway, Finland, India, Egypt, the United States and South Africa. SQS also has a minor stake in an operation in Portugal and a partnership operation in Spain.
With more than 5,000 completed projects, SQS has a strong customer base including 36 FTSE-100 companies, half of the DAX 30 and nearly a third of the STOXX-50. It supports clients in a wide range of industries, including major corporations such as Deutsche Bank, Deutsche Telekom, Deutsche Post, Barclays, Allianz, Meteor, BP, JP Morgan, Volkswagen, and Daimler.
www.sqs-group.com
Chief Executive's Statement
Introduction
2008 was another financially successful year for SQS. We continued to record double digit growth in both revenues and profits, as we have every year since our flotation. Furthermore, we improved cash collection, such that debtor days are now at a record low of 55 days, finishing the year with a net cash position of €5.1m (2007: €6.9m). We have achieved this despite the global economic downturn. Such a resilient performance attests to the strength of our offering, the solidity of our positioning and the nature of software testing as a non-discretionary-spend item.
2008 was also a time of significant operational development, particularly in the context of our core strategic objective of expanding our off-shoring capabilities. During the period we established an off-shore facility in Egypt and home-shore operations in the east of Germany to serve the German and French speaking markets. This has been further bolstered by acquisitions made during the year; in particular India-based Verisoft which has considerably enhanced our off-shoring capabilities.
As a result of the progress made this year, SQS now possesses the most extensive offshore operations of any independent software testing specialist, further enhanced by multi-language, multi-time-zone capabilities. Additionally, our blend of homeshore and offshore resources gives us competitive advantages over outsourcing specialists based in India who are only able to offer fully offshore solutions.
We believe that our capability in this area will be a key factor in helping SQS to continue to perform strongly during the economic downturn, as customers look to save costs through the blended on-site/off-shore solutions that we can provide. As such, we believe that our expansion into off-shoring has been extremely well timed and we will look to continue with this strategy throughout 2009.
New Business
During 2008 we signed a record 175 new customers (2007: 155) across 27 distinct verticals, highlighting both the defensive qualities of our business and the breadth of the market into which we are able to sell our services. Contract wins in new or non-traditional verticals such as Pharmaceuticals & Biotechnology (5% of new wins), Travel & Leisure (5%), Healthcare (3%), Transportation (3%) and the Public Sector (5%) also demonstrate our considerable success in reducing further our exposure to any one sector.
Highlights for the year include wins with Port of Gothenburg, the Swedish port authority; HÄVG, the organisation that manages the contracts for the German Association of General Practitioners; and Eversheds, the international law firm. We are also able to announce that since the year end we have secured a major new contract with a leading retailer in the Nordic countries; a contract with a major UK utility company to provide testing services for the organization's internet and SAP systems; and that we have been chosen by a global telecoms company to test the latest release of their business critical applications.
In addition to the high number of new business wins, we have also witnessed an increase in the number of long term contracts with our customers. This again has been helped by the greatly enhanced off-shore solutions we now provide. Such contracts are providing us with increasing visibility of earnings.
The strong performance in new business has been supported by a 75% renewal rate of existing contracts, demonstrating the resilience of the business and a generally high level of customer satisfaction. Such a high level of repeat revenues gives us further confidence in the predictability of future earnings and provides us with a solid, robust platform for future growth.
Services and product lines
Professional services for business and IT
Our main revenue stream comes from the provision of professional testing services, 90% of which are IT related. SQS is constantly refining and improving its offerings in this field and now offers over 35 software testing and quality management services, considerably more than any of our competitors. Newer offerings, such as agile testing and application security for payment cards, help us to forge relationships with clients at the highest level, and give us greater influence over the projects on which we work creating plentiful opportunities to cross-sell additional services. Many of these newer services are attaining rapid growth rates at present, though from a smaller base than our traditional testing services.
Conferences and events
Of increasing importance to SQS are our successful SQC conferences (Software and Systems Quality Conferences). These were the largest series of quality management and software testing events in the world held during 2008. SQS held events in six cities during the year, most recently in London, Zurich, Canberra, Australia, and Dublin; with forthcoming events planned in, Geneva, Dusseldorf and Stockholm. These events have proved an excellent marketing platform for SQS, and the independent testing industry as a whole; they also help to raise awareness among organisations of the increased effectiveness of using an impartial, independent body to provide software testing and quality management. This increased awareness has culminated in independent software testing being recognised as a distinct industry by independent analysts from Gartner and Forrester. Conferences and events contributed approximately 1% of 2008 revenues.
Tools, licences, and maintenance
Our unique tools have been developed during our 27 years' experience of testing software projects. This has resulted in a product set that provides consistent and measurable results, with several components integrated into other market leading tools. Tools and maintenance accounted for approximately 1.2% of our total 2008 turnover (2007: 1.8%). Our tools are also fully integrated into our services and offerings. Furthermore, all staff in our offshore/homeshore centres use our tools to ensure seamless interaction with the onshore element of the client project.
IT training
We introduced a number of new training offerings during the year, including INTCCM (International Certified Professional in Configuration Management) and Application Lifecycle Management Practices. Since their introduction, we have witnessed considerable demand for these offerings, driven by the IREB's (International Requirements Engineering Board) newly introduced requirements for certification in these fields. As one of the first Professional Service Organisations to demand the new QAMP (Quality Assurance Management Professional) certification for its employees, SQS also introduced training for this qualification during 2008. Revenue from training expanded in line with the Company's growth rate during the period and represented about 3% of total 2008 revenues (2007: 3%).
Acquisitions
Validate
SQS completed the acquisition of 100% of the issued share capital of Validate Group, a Nordic Software Testing & Quality Management company, on 2 July 2008.
Maximum consideration for the acquisition will be Swedish Krona (SEK) 153.3m (€16.4m). An initial consideration of SEK68.1m (€7.3m) was paid on completion and up to a further SEK85.2m (€9.1m) may become payable upon the achievement of certain performance targets over the three years following completion. Overall 25% of the consideration will be satisfied in cash and 75% will be satisfied by the issue of new SQS ordinary shares to the vendors.
Headquartered in Sweden, Validate also has operations in Norway and Finland. These are mature markets which understand the benefits of independent testing and SQS has secured a number of new contracts in these regions following the acquisition. In addition to expanding SQS's leading presence in the European software testing market, the acquisition has provided Validate with access to the scale and off-shoring facilities required to attract such large, long-term contracts. To date, Validate has added 70 staff and 20 customers to SQS's portfolio.
Verisoft
SQS ultimately completed the acquisition of 75% of the issued share capital of VeriSoft, a leading provider of software testing and quality assurance services within India, on 4 July 2008. The maximum consideration for the acquisition will be €1.8m, of which 44% will be satisfied in cash (including the initial cash payment of €0.61m) and 56% by the issue of new SQS shares. In a first step we acquired 60% of the Verisoft shares in July 2008. We have also retained the option to purchase the remaining 25% of the issued share capital between April 2011 and April 2016 for a consideration determined by Verisoft's Profit after Tax performance.
The acquisition of Verisoft has been of considerable strategic importance to SQS as it has enabled us to benefit from the increasing customer requirement for blended on and off-shore testing solutions. This requirement has grown in importance during the current economic downturn as expenditure-conscious companies, while wishing to maintain the value-added benefits of having on-site testing engineers, have also looked to take advantage of the cost-savings inherent in off-shoring.
As a result, the acquisition had a material impact upon the sales of our blended onshore/offshore solutions during the second half of 2008, with numerous contracts signed with both new and existing customers. The acquisition has also had the added effect of increasing the average length of contracts, as the lower costs associated with off-shoring has caused organisations to view the outsourcing of their testing operations as an increasingly attractive proposition.
With 150 staff members headquartered in the software development region of Pune, and a small operation in the US, Verisoft considerably expanded our off-shore capacity while improving our coverage of multiple languages and time zones. The acquisition also allowed us to provide an improved level of support to our, mainly UK, customers who have all or part of their software development operations located in India.
Cresta and Triton Earn-Outs
During the period we announced the completion of the two year earn-out period associated with the acquisition of Cresta Limited in 2006. The targets set for the period were exceeded by a significant margin, resulting in the issue of 2.4m new SQS ordinary shares to meet the maximum additional consideration of £18m (€20.1m) and served to validate the rationale behind the acquisition. On 31 December 2008 we were also pleased to announce that Triton (now called 'SQS Group Management Consulting Insurance'), the Austrian IT consulting company acquired in August 2007, had exceeded its first earn-out target.
Market drivers
As is evident from the record number of contracts signed during the period, there has been limited impact from the global economic downturn on SQS to date. We believe that this is due to a number of factors.
The increased need for companies to reduce costs in response to recessionary pressures should expedite the general trend of companies looking to outsource their in-house testing resources. The cost-savings available from utilising our blended on-shore/off-shore services therefore makes our offering especially attractive in the current climate.
Our considerable off-shore capacity also means that, should existing clients seek different pricing models from us, we have the flexibility to address this by increasing the off-shore element of the service we offer them without reducing our overall margins. As such, we believe that the substantial expansion of our off-shoring facilities during 2008 was well-timed.
Software testing is applicable across a wide spectrum of industry sectors. During the year we have successfully expanded the number of verticals to 27 into which we sell our services, with a healthy spread of clients across each. As a result, we are not overly-exposed to a downturn in any given industry. Our presence across multiple geographies also reduces our exposure to a downturn in any specific region and we have the flexibility to locate staff where demand is greatest.
We tend to provide testing for business critical software, such as payment systems, which in many cases represent non-discretionary spend and will therefore always require testing. In addition, cutting corners on testing does not make economic sense to businesses that are looking to reduce costs as the costs of addressing issues post implementation can run to many times the initial outlay.
Furthermore, the introduction of regulations governing IT systems by directives such as Basel II, Sarbanes Oxley or MiFID, means that certain business have no choice but to carry out adequate software testing. Regulations such as these have come about as the result of the, often high profile, failure of large numbers of software projects over recent times. According to the latest published Standish report, 19% of software projects currently fail as a consequence of time constraints or lack of impartiality.
These failures, which can result from the partial nature of in-house software testing, are helping to drive awareness of the importance of independence in software testing. This has been recognised in recent studies from independent industry analysts such as Ovum, Forrester and Gartner. Forrester recently stated that: "Much of the recent growth in outsourced application services has been fueled by customers engaging independent testing services, where the development provider is separate from the provider performing the testing." Similarly, during the year, Gartner recognised Independent Software Testing as a sector in its own right: "More and more companies look into independent testing as the offerings of an increasing number of service providers mature. It seems that independent testing is shaping as a separate market segment".
We recognise that no company can be completely immune to recession, indeed industry analysts have predicted a slowdown in the growth rates for the wider IT services industry from 4% in 2008 to 1.5% in 2009. However, taken together, we believe that the above factors should enable our markets to hold up well in 2009 and beyond.
Business strategy
The core strategy is to build upon our market position as the global leader in independent software testing and quality management services, primarily through selling more combined onshore/offshore projects. We view the advances made during 2008 in this regard as only the beginning of this strategy.
Our ability to provide blended onshore and offshore solutions enables us to offer our clients more favourable pricing while still providing them with industry-leading engineers to manage the testing requirements on-site. By allocating onshore resources to the most mission-critical aspects of a project and farming out less risk-sensitive aspects to the off-shore centres, we are able to maximise the value our clients receive in term of both cost and quality of service. The effect of this has been an increase in the number of long term contracts we have secured during the period, resulting ultimately in greater levels of repeat revenues, which currently stand at approximately 75%.
Furthermore, the formation of our Egypt off-shore centre (with 80% German and 20% French speaking skills) has proved highly attractive to clients whose requirements were not necessarily being met through the off-shore industry's traditional English-speaking services. We will therefore not only look to increase capacity by expanding our off-shoring operations, but will look to increase the number of languages and time zones that we cover, thereby further improving the attractiveness of our offering to global organisations.
Our acquisition of off-shoring operations in India has proved particularly attractive to UK and international companies, as many of these have all or part of their testing and development operations in India already. Our ability to offer a blended on-shore off-shore service also gives us an advantage over our India-based competition, which is invariably limited to providing wholly off-shore solutions. As such, we will be actively looking to increase our off-shore business opportunities in the Indian and Oceanic regions in future.
A second aspect of our strategy has been to bundle various elements of our 35 services into modules that address specific client requirements and play to our consulting strengths. We have recently created ten such packages, which address each of the most common software-testing needs faced by organisations. For example, the recent increase in M&A activity, particularly in the financial sector, has led to an increase in the need for IT systems to be merged. The resultant need to test these integrations is met by our 'Merging IT Systems' bundled offering. Other examples include 'Rapid Implementation of SAP' and 'Early Error Detection using Test Case Specification'..
These offerings are essentially a marketing initiative, enabling us to clearly demonstrate the business requirements we address and the many benefits of using our services, namely: reduced costs and risks and improved efficiency and transparency. For example, we can highlight the specific ROI of each offering and the associated cost savings (20% in the case of the 'Early Error Detection using Test Case Specification'). This initiative was launched in the first quarter of 2009 and early indications are that ot has been well received.
A third element of our strategy is to increase our focus on sales and marketing and to devote additional time and resource to meeting potential clients. During 2008 we increased our direct sales staff from 27 to 34 people and, although the bulk of this expansion is complete, we expect to recruit further sales staff in the coming year. Although we are not witnessing any material signs of a slowdown at present, we believe it is prudent to invest now in order to be better prepared for the future, and to enable us to continue to increase our market share going forward.
Dividend
SQS will pay a dividend for the full year of 11c per share (in accordance with German law, SQS may only pay one dividend in each financial year). As in previous years, the dividend payment is calculated as approximately 30% of the adjusted profit after tax.
Subject to shareholder assembly approval on 20 May 2009, the dividend will be paid on 22 May 2009 to all shareholders on the register at 15 May 2009.
The Board
We were pleased to appoint David Cotterell, CEO of SQS UK, Ireland, South Africa and India, to the Management Board on 1 July 2008. Prior to working for SQS, David was Managing Director of Cresta Ltd, SQS's successful acquisition made in 2006. There were no further changes to either the Management Board or the Supervisory Board during 2008.
On 3 March 2009 Matthias Baunach was appointed to the Supervisory Board as the elected employee representative (in accordance with German legal requirements). Scott Hansen left the supervisory board on that date and the management of SQS would like to express their thanks to Scott for his contribution to the Company over the past 9 years.
Employees
Staff numbers at SQS grew from 1012 at the end of 2007 to 1436 as at 31 December 2008. The increase primarily results from the expansion of our off-shoring facilities, which now have over 350 staff members, in comparison to 100 at the beginning of the year.
We would like to announce that, post the year end, we were one of 260 companies shortlisted in Germany for the Ernst & Young sponsored 'Great Place to Work' awards, in which we were ultimately voted in the top 10%. This is a global competition that carries great cachet around the world, particularly in Germany, and can be a powerful tool in helping organisations attract and retain high quality staff. This is especially important in a people business such as SQS and we are confident that this commendation will help us to further reduce our historically low staff churn rate of 8% to 10%.
On behalf of the Board of SQS I would like to take this opportunity to offer a warm welcome to the employees that joined SQS during the year. I would also like to thank all of our staff members for their considerable contribution throughout 2008, which enabled us to continue to report significant progress during the period.
Outlook
We are pleased to report that the strong demand for our services, experienced throughout 2008, has continued into the first quarter of the current year. If demand were to continue at such levels throughout 2009, we would expect to comfortably meet our expectations for the year.
As was the case in 2008, despite recording underlying growth, the contribution from our UK business continues to be impacted by unfavourable movements in the currency exchange rate. However, this is being compensated by a good performance from our German operations and strong demand in Switzerland. Consequently we are looking forward to the rest of 2009 with a substantial degree of confidence.
Rudolf van Megen
Chief Executive Officer
10th March 2009
Financial Review
Summary
Group turnover during the period was up by 18% to €142.9m (2007: €121.1m). Geographically, we saw significant underlying revenue growth across all of the regions in which we operate. However, on translation into Euros, revenues from the UK, Ireland, South Africa and India segment were depressed owing to unfavourable exchange rate movements.
In Germany, our largest market, we achieved significant top line growth of 23.4%. We also performed strongly in Switzerland with revenue growth of 12.8% and continued our penetration of the UK, Ireland and South African markets, recording an increase in sales of 9.4% (before exchange rate effects). On translation into Euros, revenues from UK, Ireland, SA and India reduced by 5.4% year on year. The above growth rates were primarily organic in nature.
Other Countries (including Nordic, Austria, the Netherlands and Egypt) recorded a 239% increase in turnover, the bulk of which came from the successful acquisitions of Triton in August 2007 and Validate and Verisoft in July 2008, all of which have now been fully integrated into the Group.
Foreign Exchange
Foreign exchange had a negative impact on reported performance for the period. 28% of Group revenue is generated by our UK operation and on a constant currency basis (ie had the Pound/Euro exchange rate remained the same as at the end of 2007) our reported revenues would have been €150.1m and we would have recorded an additional €0.5m in profits before tax. However, the change in the currency exchange rate does has an overall positive effect when translating our results from Euros into Sterling in order to calculate financial ratios such as P/E.
Approximately 40% of the Group's 2008 turnover was generated in non-Euro currencies (2007: 45%). 2008 local currency revenues were translated into Euros at the official average exchange rates for the first and second half respectively. For the conversion of the balance sheet items from foreign currency into Euros, the official mean rate as at 31 December 2008 was used.
Germany
Revenue in Germany, our largest market, amounted to €68.7m (2007: €55.7m), a rise of 23.4%. Growth was predominantly organic, reflecting strong demand for our core services of testing for SAP applications and management consulting in insurance, and was substantially enhanced by the Homeshore centre in Goerlitz.
United Kingdom/Ireland/South Africa/India
These geographies continued to make good progress during the year. However, revenues were impacted by the fall in the value of sterling such that we witnessed a 5.4% decrease in Euro denominated revenues to €46.1m (2007: €48.7m). On a constant currency basis i.e. with exchange rates remained the same as in 2007, Euro denominated revenue would have been €53.3m, suggesting an underlying growth rate of 9.4%. The VeriSoft acquisition in India, executed in July 2008, made its maiden revenue contribution to the Group of €0.8m.
Switzerland
Operations in Switzerland witnessed strong organic growth during the year, generating revenues of €14.1m (2007: €12.5m), a 12.8% rise over the previous year.
Other Countries
We have witnessed significant revenue growth in our 'Other Countries' geography, which consists of Austria, the Netherlands, the Nordic countries and Egypt. Revenues in these markets increased 239% to €14.0m (2007: €4.1m). This growth was predominantly due to the acquisitions of Triton and Validate. The Triton acquisition, made in August 2007, was consolidated for only part of 2007, while Validate, which was acquired in July 2008, made its maiden revenue contribution to the Group of €4.7m.
The formation of the new German and French language offshore centre in Egypt resulted in losses of €0.4m during the year due to non-recurring start up costs and operational losses from staff build up and training. We expect this new operation to contribute to profit in 2009.
Margins and Profitability
Gross profit was up 19% to €49.6m (2007 €41.8m) with the gross margin increasing to 34.7% (2007: 34.5%).
Adjusted profit before tax* was up by 26% to €13.1m (2007 €10.5m) with the profit margin improving to 9.2% (2007: 8.6%).
Adjusted earnings per share** grew by 5% to €0.43 (2007 €0.41).
*adjusted in accordance with IFRS to add back pro forma interest on deferred payment milestones for acquisitions of €0.7m, amortisation on intangible assets of acquired companies of €1.1m and exceptional costs for starting up the new offshore centre in Egypt of €0.4m.**based on adjusted profit before tax less the actual tax rate for operations of 26.7%. The tax difference between reported and adjusted taxes is €0.6m which is a balance of deferred taxes under IFRS and taxes on dividend payments between SQS group companies.
Costs
General & Administrative expenses totalled €22.5m (2007: €19.0m) representing 15.7% of Group revenues (2007: 15.7%). Absolute cost increases resulted from hiring and staff training as well as from the first time full year consolidation of Triton and other acquisitions in the second half of 2008.
Sales & Marketing expenses totalled €10.5m (2007: €8.6m) representing 7.4% of Group revenues (2007: 7.1%). Cost increases resulted from adding sales capacity and increasing the number of marketing campaigns in an effort to improve lead generation, thereby offsetting any negative impacts from potentially weakening markets.
Research & Development expenses totalled €3.1m (2007: €3.6m) representing 2.2% of Group revenues (2007: 3.0%). Cost savings resulted from making more effective use of innovation groups, the costs from which are included in the cost of sales.
Cash Flow and Balance Sheet
Cash flow from business activities continued to improve to €12.6m (2007: €11.4m), primarily as a consequence of maintaining a high level of rapid invoicing and collection from debtors. Debtor days were 55 (2007: 61) due to the further progress in our administrative processes.
Cash outflow from financing activities was €(4.3)m (2007: (€1.2)m) and includes a dividend payment of €(4.3)m in May 2008. Cash outflow from investments was €(9.4)m (2007: €(5.5)m), including €(2.1)m (2007: €(1.9)m) for capitalised R&D for products, €(4.6)m (2007: €(1.1)m) for investments in IT infrastructure and SAP for the new SQS ERP system and €(3.3)m (2007: €(3.1)m) as cash payments for the acquisition of the Validate and Verisoft shares (2007: Triton shares including € 1.3m cash on their balance sheet). Cash at the year end was €5.8m (2007: €7.2m).
Shares were issued during the year only in accordance with consideration obligations with regards to previous acquisitions. The main share issues were 1.2m shares to the vendors of Validate in August 2008, 2.4m shares to the vendors of Cresta as part of the final payment milestone in November 2008 and 1.0m shares to the vendors of Triton as part of the second milestone payment in December 2008.
Taxation
The reported tax charge of €4.1m includes current tax expenses of €4.0m (2007: €2.5m) and deferred taxes of €0.2m (2007: (€0.5m)).
We anticipate a tax rate of 28% for 2009.
International Financial Reporting Standards (IFRS)
The Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group") are prepared in conformity with all International Financial Reporting Standards (IFRS), formerly International Accounting Standards, and Interpretations of the International Accounting Standards Board (IASB) which are to applied for those financial statements whose reporting period starts on or after 1 January 2008. The same accounting and valuation method used for the 2007 annual Consolidated Financial Statements was applied. The Consolidated Financial Statements have neither been audited nor reviewed.
The SQS Group Consolidated Financial Statements for the twelve month period ended 31 December 2008 is presented in Euros.
Rene Gawron
Chief Financial Officer
10 March 2009
Consolidated Income Statement
As at 31 December 2008 (IFRS)
|
Year ended 31 December 2008 |
Year ended 31 December 2007 |
|||||
|
T€ |
(Notes) |
(unaudited) |
(audited) |
|||
|
Revenue |
142,903 |
121,059 |
||||
|
Cost of sales |
93,294 |
79,307 |
||||
|
|
|
|||||
|
Gross profit |
49,609 |
41,752 |
||||
|
General and administrative expenses |
24,075 |
19,244 |
||||
|
Sales and marketing expenses |
10,515 |
8,621 |
||||
|
Research and development expenses |
3,126 |
3,614 |
||||
|
|
|
|||||
|
Profit before tax and financing result (EBIT) |
11,893 |
10,273 |
||||
|
Finance income |
317 |
556 |
||||
|
Finance costs |
1,368 |
1,163 |
||||
|
Net interest |
-1,051 |
-607 |
||||
|
|
|
|||||
|
Profit before taxes (PBT) |
10,842 |
9,666 |
||||
|
Income tax |
(2) |
4,146 |
2,932 |
|||
|
|
|
|||||
|
Profit for the year |
6,696 |
6,734 |
||||
|
Attributable to: |
||||||
|
Equity shareholders |
6,696 |
6,734 |
||||
|
Minority interests |
0 |
0 |
||||
|
|
|
|||||
|
Consolidated profit for the year |
6,696 |
|
6,734 |
|||
|
Earnings per share, undiluted (€) |
(3) |
0.30 |
0.35 |
|||
|
Earnings per share, diluted (€) |
(3) |
0.29 |
0.34 |
|||
|
Earnings per share, adjusted (€) |
(3) |
0.43 |
0.41 |
Consolidated Balance Sheet
As at 31 December 2008 (IFRS)
|
31 December 2008 |
31 December 2007 |
|||||
|
T€ |
(Notes) |
(unaudited) |
(audited) |
|||
|
Current assets |
||||||
|
Cash and cash equivalents |
5,753 |
7,220 |
||||
|
Trade receivables |
26,161 |
27,173 |
||||
|
Other receivables |
2,020 |
1,000 |
||||
|
Work in progress |
301 |
139 |
||||
|
Income tax receivables |
415 |
157 |
||||
|
34,650 |
35,689 |
|||||
|
Non-current assets |
||||||
|
Intangible assets |
(4) |
10,740 |
5,999 |
|||
|
Goodwill |
(4) |
52,652 |
45,977 |
|||
|
Property, plant and equipment |
3,168 |
2,243 |
||||
|
Income tax receivables |
(2) |
1,388 |
1,512 |
|||
|
Deferred taxes |
(2) |
382 |
867 |
|||
|
68,330 |
56,598 |
|||||
|
Total Assets |
102,980 |
92,287 |
||||
|
Current liabilities |
||||||
|
Bank loans and overdrafts |
458 |
191 |
||||
|
Finance lease |
548 |
515 |
||||
|
Trade creditors |
4,273 |
3,547 |
||||
|
Other provisions |
44 |
102 |
||||
|
Tax accruals |
2,308 |
1,668 |
||||
|
Tax liabilities |
4,122 |
3,745 |
||||
|
Other Current liabilities |
17,276 |
24,162 |
||||
|
29,029 |
33,930 |
|||||
|
Non-Current liabilities |
||||||
|
Bank loans |
175 |
105 |
||||
|
Finance lease |
557 |
279 |
||||
|
Other provisions |
231 |
92 |
||||
|
Pension provisions |
39 |
147 |
||||
|
Deferred taxes |
(2) |
2,603 |
1,652 |
|||
|
Other Non-Current liabilities |
7,390 |
7,064 |
||||
|
10,995 |
9,339 |
|||||
|
Total Liabilities |
40,024 |
43,269 |
||||
|
Shareholders' equity |
(5) |
|||||
|
Share capital |
26,185 |
21,546 |
||||
|
Share premium |
33,114 |
25,029 |
||||
|
Statutory reserves |
53 |
53 |
||||
|
Other reserves |
-2,543 |
-1,381 |
||||
|
Retained earnings |
6,147 |
3,771 |
||||
|
Equity attributable to equity shareholders |
62,956 |
49,018 |
||||
|
Minority interests |
0 |
0 |
||||
|
Total Equity |
62,956 |
49,018 |
||||
|
Equity and Liabilities |
102,980 |
92,287 |
||||
Consolidated Cash Flow Statement
As at 31 December 2008 (IFRS)
|
Year ended 31 December 2008 |
Year ended 31 December 2007 |
||
|
T€ |
(unaudited) |
(audited) |
|
|
Net cash flow from operating activities |
|||
|
Profit before taxes |
10,842 |
9,666 |
|
|
Add back for |
|||
|
Depreciation and amortisation |
5,006 |
3,854 |
|
|
Profit on the sale of fixed assets |
10 |
52 |
|
|
Other non-cash income not affecting payments |
-81 |
-554 |
|
|
Net interest income |
888 |
855 |
|
|
Operating profit before changes in the net current assets |
16,665 |
13,873 |
|
|
Increase in trade receivables and |
|||
|
receivables from partly completed contracts not yet billed |
2,635 |
-3,991 |
|
|
Increase (decrease) in work in progress, other assets |
|||
|
and pre-paid expenses and deferred charges |
-654 |
518 |
|
|
Increase in trade creditors |
355 |
1 |
|
|
Increase (decrease) in remaining accruals |
-867 |
3,780 |
|
|
Decrease in pension accruals |
-108 |
-147 |
|
|
Decrease in other liabilities and |
|||
|
deferred income |
-1,333 |
-494 |
|
|
16,693 |
13,540 |
||
|
Cash effect of foreign exchange rate movements |
163 |
-249 |
|
|
Interest payments |
-355 |
-497 |
|
|
Tax payments |
-3,919 |
-1,440 |
|
|
Net cash flow from operating activities |
12,582 |
11,354 |
|
|
Cash flow from investment activities |
|||
|
Purchase of intangible assets |
-4,078 |
-2,090 |
|
|
Purchase of property, plant and equipment |
-2,171 |
-840 |
|
|
Cashflows arising from business combinations |
-3,410 |
-3,088 |
|
|
Proceeds from the sale of property, plant and equipment |
225 |
0 |
|
|
Foreign currency result |
-163 |
249 |
|
|
Interest received |
229 |
241 |
|
|
Net cash flow from investment activities |
-9,368 |
-5,528 |
|
|
Cash flow from financing activities |
|||
|
Dividends paid |
-4,320 |
0 |
|
|
Proceeds from the issue of share capital |
140 |
4,817 |
|
|
Costs for issue of shares |
0 |
-100 |
|
|
Increase of shareholder loans |
650 |
0 |
|
|
Repayment of finance loans |
-469 |
-5,497 |
|
|
Increase of finance loans |
208 |
0 |
|
|
Redemption / termination of leasing contracts |
-482 |
-391 |
|
|
Net cash flow from financing activities |
-4,273 |
-1,171 |
|
|
Change in the level of funds affecting payments |
-1,059 |
4,655 |
|
|
Changes in the financial resources due to exchange rate movements |
-408 |
0 |
|
|
Cash and cash equivalents |
|||
|
at the beginning of the period |
7,220 |
2,565 |
|
|
Cash and cash equivalents |
|||
|
at the end of the period |
5,753 |
7,220 |
1. Summary of Significant Accounting Policies
Basis of preparation
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, formerly IAS = International Accounting Standards) and the Interpretations of the IASB (International Accounting Standards Board) adopted by the EU 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 2008. The new and revised Standards and Interpretations of the IASB were not applied in the business year 2008 prior to the implementation date stipulated.
The Financial Information has been prepared on the historical cost basis. The Financial Information is presented in Euros and amounts are rounded to the nearest thousand (T€) except when otherwise indicated.
Statement of compliance
The Financial Information of SQS and its subsidiaries (together the 'SQS Group') has been prepared in accordance with IFRS as adopted for use in the EU.
First-time application of new standards, change in accounting policy and adjustment of figures from the previous year
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 2008. The changes do not have any effect on the accounting treatment of assets and liabilities or their valuation.
SQS does not apply any further changed or newly passed standards prior to the implementation date stipulated. Further, according to the assessment of SQS, the application of these standards would not have any effect on the financial statements.
The accounting policies adopted are consistent with those of the previous financial year.
Basis of consolidation
The Financial Information comprises 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.
All inter-company balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full.
Subsidiaries are consolidated from the date on which control is transferred to the SQS Group and cease to be consolidated from the date on which control is transferred out of the SQS Group.
As at 31 December 2008, the Company held interests in the share capital of more than 20 % of the following undertakings:
|
Country of incorporation |
31.12.2008 |
31.12.2007 |
|||||
|
Share of capital |
Equity |
Result for the year |
Share of capital |
Equity |
Result for the year |
||
|
% |
T€ |
T€ |
% |
T€ |
T€ |
||
|
Consolidated companies |
|||||||
|
SQS Group Limited (formerly Cresta Group Limited), London |
UK |
100.0 |
4,015 |
756 |
100.0 |
4,711 |
2,822 |
|
SQS Software Quality Systems (Ireland) Ltd., Dublin |
Ireland |
100.0 |
2,470 |
1,440 |
100.0 |
2,195 |
1,201 |
|
SQS Nederland BV, Zaltbommel |
The Netherlands |
90.5 |
-178 |
-45 |
90.5 |
-133 |
-52 |
|
SQS GesmbH, Vienna |
Austria |
100.0 |
378 |
228 |
100.0 |
-274 |
-111 |
|
Software Quality Systems (Schweiz) AG, Zug |
Switzerland |
97.0 |
1,518 |
161 |
97.0 |
1,231 |
705 |
|
SQS Group Management Consulting GmbH (formerly Triton Unternehmensberatung GmbH), Vienna, since 1 September 2007 |
Austria |
100.0 |
3,204 |
2,158 |
100.0 |
1,973 |
660 |
|
SQS Group Management Consulting GmbH (formely Triton Unternehmensberatung GmbH Deutschland), Munich, since 1 September 2007 |
Germany |
100.0 |
119 |
43 |
100.0 |
51 |
12 |
|
SQS Egypt S.A.E, Cairo, since 25. February 2008 |
Egypt |
100.0 |
-396 |
-428 |
- |
- |
- |
|
SQS Software Quality System Nordic AB (formerly Validate Technology Svenska AB), Kista, since 1. July 2008 |
Sweden |
100.0 |
323 |
-18 |
- |
- |
- |
|
SQS India (formerly VeriSoft InfoSystems and VeriSoft InfoServices), Pune, since 4. July 2008 |
India |
60.0 |
442 |
74 |
- |
- |
- |
Since 25 February 2008 SQS has opened a test centre in Cairo. SQS Egypt S.A.E. is a fully owned subsidiary of SQS AG. The company operates as an offshore centre for Quality Management & Software testing activities.
Taking effect on 2 July 2008 SQS AG acquired 100 % of the shares of Validate Technology Svenska AB ("Validate") and its subsidiaries. The acquisition comprises an initial consideration of 2.7 m€ in cash and 4.6m€ through the issuance of 1,221,144 new SQS ordinary shares and deferred consideration of up to 16.4 m€ in total, to be paid in a combination of cash and shares (25 % cash / 75 % shares).
Taking effect on 4 July 2008 SQS AG acquired in India 60 % of the issued share capital of VeriSoft Info Systems and VeriSoft InfoServices ("VeriSoft"), a group of independent software testing companies based in India. The initial consideration was due as a cash payment on Closing in the amount of 0.61m€ (40 mINR). A further consideration of 1 m€ (68 mINR) is deferred and depending on the achievement by VeriSoft of specified growth and profit targets by VeriSoft over two years following closing. This further consideration will lead to the transfer of additional 15 % of the shares in VeriSoft to SQS. Furthermore SQS will pay 0,2 m€ (13 mINR) for a 95 year lease over the land that Verisoft has been allotted in the Special Economic Zone ("SEZ") IT Technology Park in Pune. Altogether the maximum consideration for the acquisition of 75 % of VeriSoft will be 1.8 m€ (121m INR) of which 44 % will be paid in cash and up to 56 % can be satisfied by the issue of new ordinary SQS-shares to the vendors.
In according to the agreement SQS has an option to purchase the remaining 25 % of the shares in Verisoft between April 2011 and April 2016. The vendors also have a put option to sell the remaining 25 % of the shares in Verisoft to SQS between April 2011 and April 2016.
3% of the shares in Software Quality Systems (Schweiz) AG are held for legal reasons by members of the board of this entity on behalf of the beneficial interests of SQS.
SQS AG holds 15% of the shares of SQS Portugal Lda with a book value of 0 € (previous year 0 €).
2. Taxes on earnings
Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The calculation is based on the tax rates anticipated in the respective countries as at the realisation date. These are essentially based on the statutory provisions applicable or passed by the government at the date of the Financial Statements.
As a basic principle, SQS Software Quality Systems AG in Germany is liable to corporate income tax, the solidarity surcharge and trade tax. The results of the Company are subject to corporate income tax. Effective 1 January 2008 the German corporate income tax has been reduced from 25% to 15%. A 5.5% solidarity surcharge is imposed on corporate income tax. The trade income tax amounts to 15.75% of the taxable income and is deductible for the purpose of determining the taxable income. Consequently the total income tax rate is reduced to approx. 30 %.
Consolidated income tax expense is as follows:
|
31 December 2008 |
31 December 2007 |
|
|
|
T€ |
T€ |
|
Current tax expense |
3,993 |
2,485 |
|
Tax on IPO costs |
0 |
40 |
|
Deferred tax |
225 |
493 |
|
Capitalisation of the corporation tax credit |
(72) |
(86) |
|
|
----------- |
----------- |
|
Taxes on income |
4,146 |
2,932 |
|
----------- |
----------- |
A reconciliation of income tax applicable to the accounting profit before income tax at the statutory income tax rate to the income tax expense in the income statement is as follows:
|
|
31 December 2008 |
31 December 2007 |
|
|
T€ |
T€ |
|
Profit/ (loss) before tax multiplied by the standard rate of German income tax of 30 % (previous 40%) |
3,253 |
3,866 |
|
Adjustments in respect of current income tax of previous years |
261 |
(143) |
|
Differential tax rates in respect of overseas subsidiaries |
81 |
(1.065) |
|
Recalculation of deferred taxes |
- |
80 |
|
Expenditure not allowable for income tax purposes |
23 |
148 |
|
Not allowable personnel expenses for stock options |
53 |
43 |
|
Adjustments for tax losses carried forward |
85 |
76 |
|
Tax of dividend payout of subsidiaries |
476 |
- |
|
Other |
(14) |
13 |
|
Capitalisation of the corporation tax credit |
(72) |
(86) |
|
|
----------- |
----------- |
|
At effective income tax rate of 38.2 % (2007: 28 %) |
4,146 |
2,932 |
|
|
----------- |
----------- |
Deferred taxes with an amount of 122 T€ (2007: 111 T€) were charged directly to equity.
In accordance with § 37 KStG (German corporation tax law) SQS has capitalised the corporation tax credit on 31 December 2006 at a present value of 1,426 T€. As at 31 December 2008 unaccrued interest of 72 T€ (2007: 86 T€) has been added to the corporation tax credit. This tax credit is paid off by ten instalments since the year 2008 until 2017. The present value has been discounted using an interest rate of 5.5 %.
For the assessment of deferred tax assets and liabilities, SQS Software Quality Systems AG applies a tax rate based on the current tax law in Germany of 30% (2007: 30%) which takes into account corporation tax, the solidarity surcharge and trade tax. For deferred tax assets and liabilities of the overseas subsidiaries, the local tax rates are taken as the basis.
Deferred income tax relates to the following:
|
|
31 December 2008 |
31 December 2007 |
|
|
T€ |
T€ |
|
Losses carried forward |
223 |
448 |
|
Pension accruals |
2 |
20 |
|
Obligations from Cresta purchase |
0 |
238 |
|
Foreign currency adjustment |
0 |
2 |
|
Property subventions |
53 |
53 |
|
Other accruals |
104 |
106 |
|
|
----------- |
----------- |
|
Deferred tax assets |
382 |
867 |
|
|
----------- |
----------- |
|
Capitalised development costs |
(580) |
(594) |
|
Capitalised Software |
(10) |
(30) |
|
Trade receivables |
(14) |
(14) |
|
Capitalisation customer relations (Triton, Validate, Verisoft) |
(1,863) |
(1,014) |
|
Obligations from Validate and VeriSoft purchase |
(122) |
- |
|
Other |
(14) |
(0) |
|
----------- |
----------- |
|
|
Deferred tax liabilities |
(2,603) |
(1,652) |
|
----------- |
----------- |
|
|
Net deferred tax liabilities |
(2,221) |
(785) |
|
----------- |
----------- |
Deferred tax assets are recognised when it is considered probable that economic benefit will flow to the entity. Based on the earnings situation of the past and on the business expectations for the foreseeable future, value adjustments are determined if applicable.
Where a company has suffered losses, deferred tax credits thereon are capitalised if the ability in the future to set off the losses with future income is permissible under the respective national provisions. According to the planning of SQS BV, SQS Austria and SQS Nordic, a return to taxable profits is regarded as very probable.
As SQS Egypt has suffered a start up loss of 428 T€ no deferred tax asset has been capitalised.
3. Earnings per share
The earnings per share presented in accordance with IAS 33 are shown in the following table:
|
|
31 December 2008 |
31 December 2007 |
|
|
T€ |
T€ |
|
Profit for the year attributable to equity shareholders |
6,696 |
6,734 |
|
Diluted profit for the year |
6,696 |
6,734 |
|
|
--------------- |
--------------- |
|
Weighted average number of shares in issue, undiluted |
22,287,098 |
19,098,779 |
|
Dilutive effect from convertible bonds |
7,357 |
52,800 |
|
Dilutive effect from stock option programme |
856,749 |
692,016 |
|
Weighted average number of shares in issue, diluted |
23,151,204 |
19,843,595 |
|
|
--------------- |
--------------- |
|
Undiluted profit per share € |
0.30 |
0.35 |
|
Diluted profit per share € |
0.29 |
0.34 |
|
Adjusted profit per share € |
0.43 |
0.41 |
|
|
--------------- |
--------------- |
Undiluted earnings per share are calculated by dividing the profit for the year attributable to equity shareholders by the weighted average number of shares in issue during 2008: 22,287,098 (2007: 19,098,779).
Diluted earnings per share are determined by dividing the profit for the year attributable to equity shareholders by the weighted average number of shares in issue plus any share equivalents which would lead to a dilution.
The adjusted earnings per share 2008 and 2007 were calculated based on the profit after tax:
less the corporate income tax asset of T€ 72 (2007: T€ 86),
plus the tax advantage of dividend payout by SQS Ireland to Cresta in the amount of T€ 476 (2007: T€ 0),
plus the interest cost of the Cresta, Triton, Validate and Verisoft purchase obligations of T€ 691 (2007: T€ 561),
plus amortisation cost of the acquired customer relationships as part of the business combinations of Triton, Validate and VeriSoft of T€ 1,140 (2007: T€ 241),
plus start-up and business expansion expenses of SQS Egypt in the amount of T€ 428 and
plus pension interest expenses of T€ 42.
Further the difference between taxes on income payable under local GAAP and IFRS of 227 T€ (2007: T€ 468)) has been adjusted. This results in an adjusted profit after taxes of T€ 9,628 (2007: T€ 7,917). This divided by 22,287,098 shares (2007: 19,098,779) shows adjusted earnings per share of € 0.43 (2007: € 0.41).
The management board considers that there are share equivalents which could have a dilutive effect. One of these were the convertible bonds granted to the vendor of the shares in SQS Group (UK) Ltd in a total nominal amount of T€ 53, divided into 52,800 convertible bonds of a nominal value of € 1.00 each which were converted by the issue of 52,800 SQS shares on 20 February 2009. The other one of these are the stock options given to employees. On a weighted average basis over the year these amounted to 856,749 (2007: 692,016) shares. Both effects lead to an immaterial difference between undiluted earnings and diluted earnings per share. The number of potential shares is calculated on a pro rata basis.
4. Intangible assets
The composition of this item is as follows:
|
Book values |
Remaining useful life |
|
31.12. 2008 |
|
31.12. 2007 |
|
|
Years |
|
T€ |
|
T€ |
|
|
|
|
|
|
|
|
SQS UK based business |
|
|
|
|
|
|
Part I |
|
|
4,696 |
|
4,696 |
|
Part II |
|
|
6,105 |
|
6,105 |
|
Part III (Cresta) |
|
|
22,892 |
|
24,444 |
|
SQS BV, Netherlands |
|
|
555 |
|
555 |
|
Triton |
|
|
8,939 |
|
9,944 |
|
Validate |
|
|
7,329 |
|
0 |
|
VeriSoft |
|
|
1,903 |
|
|
|
Other |
|
|
233 |
|
233 |
|
Goodwill |
|
|
52,652 |
|
45,977 |
|
Development costs Capitalisation 2006 Capitalisation 2007 Capitalisation 2008 |
0 1 2 |
|
0 612 1,375 |
|
854 1,249 0 |
|
|
|
|
1,986 |
|
2,103 |
|
Software |
1 to 3 |
|
2,350 |
|
516 |
|
Customer relationships |
|
|
6,404 |
|
3,380 |
|
Intangible assets |
|
|
10,740 |
|
5,999 |
No impairment losses in accordance with IAS 36 on account of falling anticipated payments were necessary in the business year 2007. Development costs were capitalised in the business year in the amount of 2,063 T€ (in the previous year 1,874 T€) and amortised over a period of 36 months, as the conditions under IAS 38 were fulfilled.
The scheduled amortisation of goodwill was, in compliance with IFRS 3, no longer carried out. Under the performance of an impairment test in accordance with IAS 36 in the version of 2007, no reduction in the value of the goodwill was required.
Taking effect from 1 July 2006 SQS purchased 100 % of the shares of Cresta Group Ltd. This transaction included purchased goodwill of T€ 16,724 as per 1 July 2006. In accordance with the terms of the purchase agreement SQS had the obligation to pay for the profit realised above agreed targets. In 2007 the realised target led to an increase in acquisition costs of 7,720 T€. In 2008 the realised target led to the decrease in acquisition costs of 1,552 T€. This amount was fully allocated to goodwill.
The management of SQS integrated this asset into the UK based business and allocated the goodwill to this segment.
Effective on 1 September 2007, SQS acquired the shares of Triton Unternehmensberatung GmbH and its subsidiaries. In 2008 the realised target of the earn-out clause led to a decrease in acquisition costs of 1,005 T€. This amount tacked to reduce of goodwill.
Effective on 2 July 2008 SQS acquired the shares of Validate Technology Svenska AB and its subsidiaries. The business combination was analysed following IFRS 3 in the purchase price allocation. This allocation led to recognition of goodwill of 7,329 T€. According to IAS 36 the impairment test was not required because of the short notice since the initial purchase price allocation. As per 31 December 2008 no indications for any impairment losses had been observed.
Taking effect from 4 July 2008 SQS purchased 65 % of the shares of VeriSoft. The business combination was analysed following IFRS 3 in the purchase price allocation. This allocation led to recognition of goodwill of 1,903 T€. According to IAS 36 the impairment test was not required because of the short notice since the initial purchase price allocation. As per 31 December 2008 no indications for any impairment losses had been observed.
The impairment tests were carried out in accordance with IAS 36.80 for the SQS UK based business, for the Dutch subsidiary as well as for the Triton. This is the lowest level at which the management of the SQS Group continuously monitors the underlying value of the goodwill acquired with each transaction.
In order to test the recoverability of the goodwill held, the future estimated cash flows of the business units are compared with the goodwill valuations using a discounted cash flow methodology.
For this purpose, the current plans of the companies, which take into consideration the status of the accounts up until the end of November of the business year, were taken as the basis. For the year 2008, detailed planning is available in this regard; for the following years up until 2013, assumptions were made for the individual result and asset or debt items. For the period thereafter, a constant cash flow was assumed in accordance with the DCF method.
With regard to the development of earnings, it is assumed for the subsidiaries that also in the future an above-average growth in sales against the market can be achieved. In all geographical markets, the justification is clear. In the UK, a growth of approximately (2.6) % against prior year was achieved in the business year 2008 and 54 % in 2007. Main reason therefore is the strong variation of the £/€-exchange-rate. The growth-rate of SQS UKISA in £ (local currency) is +9.4%. This rate is exceeding the average local markets development for the business year 2008.
Based on the Reuters survey the £/€-exchange-rate shall stabilise and shall attain a level of 1.32 £/€. SQS business plan for 2009 are made on an assumption of 1.20 £/€.
The Management expects and has assumed that the gross margin will increase. For the first planning year the growth of 5.6 % translated in € is expected, calculated in local currency the growth rate shall be approx. 15%. In addition, it is assumed that there will be an increase in the productivity of the employees. The marketing costs and also the general and administrative costs are planned to rise absolutely whilst falling relative to sales. The central administration is, with the capacities existing today, sufficient to cope with further growth.
For the Netherlands an increase in sales of 30.2 % is expected for 2009 due to the order backlog situation and scheduled hiring of additional consultants. In the business year 2008 the growth of 65.6 % against prior year was achieved.
For Triton the growth rate of 10.5 % is expected for 2009. The assumed growth rate is 25% less than the in 2008 realised growth rate. Therefore the Management is of the opinion that the growth rate is tentatively estimated.
All business models are based on the assumption that the relevant markets are affected by the global economic crisis. The SQS Group believes that therefore companies have to innovate in IT processes to realize increasing efficiency.
For the following years the growth is reduced to 10 % from 2010 onwards. It is assumed that the headcounts will increase while general and administrative costs will decrease relative to sales.
In the planning period, on the basis of these expectations and planning assumptions, annual cash flows will be achieved which ensure a reasonable rate of return on the funds invested.
In accordance with IAS 36, the following special features were taken into account:
Expenses and income, assets and debts in connection with taxes on earnings, such as active and passive deferred taxes, tax reimbursement claims, tax liabilities and tax accruals, were eliminated both from the book value and from the use value,
The cash flows, either in or out, from financing activities have not been taken into account,
For reasons of practicability, in compliance with IAS 36.79, the trade receivables and trade creditors and also other liabilities were included in the calculations when estimating the future cash flows and the book value,
For the transition from the value of the entire business to the use value of the equity holders, the entire liabilities at market value (= book value) were eliminated,
The growth rate in perpetuity of 2 %,
The goodwill was allocated entirely to the book value of the cash generating unit in accordance with IAS 36.80 and IAS 36.81,
The discount rate was determined in accordance with IAS 36.55-57; for the cost of capital, a risk-adjusted pre-tax interest rate of 8.75 % p.a was assumed, which was calculated from a risk-free interest rate, an average risk surcharge and also a factor to take into consideration branch and other risks. For the interest on capital from outside sources, the actual interest rate of the companies between 5.5 % and 6.2 % for capital from outside sources was taken, with a slightly increasing trend in the future. Neither interest rate is corrected by taxes. The discounting was then carried out with the average interest rate weighted according to the ratio of shareholders' equity / capital from outside sources.
For the remaining goodwill values, the cash generating unit is the operating unit which currently derives benefit from the investment. This is, in the one case, the North region, in the other case the West/East region of SQS Software Quality Systems AG. In both cases, the remaining book values of the cash generating units or the goodwill are so small in relation to the anticipated returns that a detailed investigation was waived.
The amortisation of development costs is included in the costs for research and development. The amortisation of software and remaining intangible assets as well as the impairment losses under IAS 36 are spread over the functional costs in accordance with an allocation key.
No write-ups on account of the lapse of the reasons which led to value adjustments in previous years needed to be carried out in 2008, as was also the case in the business year 2007.
5. 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 26,185,075 € (in the previous year 21,546,309 €). This is divided into 26,185,075 (in the previous year 21,546,309) individual registered shares with an arithmetical share in the share capital of 1 € each. Each share entitles the holder to one right to vote. No preference shares have been issued. The capital is fully paid up.
The movements in the issued share capital are as follows:
|
Individual shares |
|
Nominal value |
|
|
|
Number |
|
€ |
|
As at 1 January 2007 |
17,190,823 |
|
17,190,823 |
|
Increase in capital against cash (Entry of 3 April 2007) |
1,500,000 |
|
1,500,000 |
|
Increase in capital against redemption of obligations from Cresta purchase (Entry of 21 September 2007) |
2,855,486 |
|
2,855,486 |
|
As at 31 December 2007 |
21,546,309 |
|
21,546,309 |
|
Capital increase from contingent share capital due to exercise of convertible bonds (Entry of 20 February 2008) |
52,800 |
|
52,800 |
|
Capital increase against contribution in kind for the acquisition of the Validate Group ( Entry of 11 August 2008) |
1,221,144 |
|
1,221,144 |
|
Capital increase against contribution in kind for the acquisition of the Cresta Group Ltd (3rd tranche) ( Entry of 28 November 2008) |
2,398,858 |
|
2,398,858 |
|
Capital increase against contribution in kind for the acquisition of the Triton Unternehmensberatung GmbH (2nd tranche) ( Entry of 29 December 2008) |
965,964 |
|
965,964 |
|
As at 31 December 2008 |
26,185,075 |
|
26,185,075 |
SQS has, on the basis of the resolution of the General Meeting of 14 September 2005, undertaken to grant the vendor of the shares in SQS Group (UK) Ltd. convertible bonds in a total nominal amount of 53 T€, divided into 52,800 convertible bonds of a nominal value of 1.00 € each, if the party entitled pays into SQS the nominal amount of 1.00 € per share. On 20 February 2008, the party entitled has exercised this right with an exercise price of 1.90 GBP/share. This resulted in the issue of 52,800 new shares.
By resolution of the General Meeting of 12 July 2005, the management board was authorized to increase the share capital by 2,072,257 € up until 12 July 2010 with the approval of the supervisory board, either through one single or several issues of newly registered non-par value shares in return for cash or contributions in kind (Authorised Capital I).
The management board resolved on 29 June 2008 an increase the share capital by issuing 1,221,144 new registered non-par value shares against contribution in kind in the form of 100 % shares in Validate. The supervisory board has consented to this resolution. This resolution became effective with the entry in the commercial register on 11 August 2008.
The supervisory board has consented to the resolution of the management board of the Company dated 9 September 2008 on the capital increase by partial use of the Authorised Capital IV from 22,820,253 € by 2,398,858 € to 25,219,211 € against residual redemption of obligations from the Cresta purchase. The issue price amounted to EUR 1.00 per share. The capital increase was registered on the commercial register on 28 September 2008.
On 25 November 2008 the management board resolved the further partially using the Authorised Capital IV and increased the share capital from 25,219,211 € by 965,964 € to 26,185,075 € by issuing 965,964 new registered non-par value shares against contribution in kind. The subject of contribution is part of the aggregate consideration for the acquisition of Triton. The supervisory board has consented to this resolution. This resolution became effective with the entry in the commercial register on 29 December 2008.
Accordingly, SQS had no shares in its ownership as at 31 December 2008.
Conditional capital
The General Meeting of 2 June 2006 resolved a conditional capital by an amount of up to €1,500,000 by issuance of up to 1,500,000 new individual registered shares (Conditional Capital II). The conditional capital II served to grant up to 1,500,000 share options until 31 December 2008 as incentive compensation for SQS employees and executives. This resolution became effective with the entry of 30 June 2006.
Authorised capital
By resolution of the General Meeting of 28 Mai 2008, the management board was authorized to increase the share capital by 4,300,000 € up until 31 April 2013 with the approval of the supervisory board, either through one single or several issues of newly registered non-par value shares in return for cash or contributions in kind (Authorised Capital IV).
On 9 September 2008 and on 25 November 2008 this authorisation was respectively partially used by issuing of 2,398,858 and of 965,964 new registered non-par value shares against contribution in kind. After this the residual authorised capital IV amounted to 935,178 €.
Thereafter, the authorised capital developed as follows:
|
T€ |
|
|
As at 1 January 2007 |
6,454 |
|
Usage of authorised capital II |
(1,500) |
|
Increase of authorised capital II |
4,300 |
|
Usage of authorised capital II |
(2,856) |
|
As at 31 December 2007 |
6,398 |
|
Increase of authorised capital IV |
4,300 |
|
Usage of authorised capital I |
(1,221) |
|
Usage of authorised capital IV |
(2,399) |
|
Usage of authorised capital IV |
(966) |
|
As at 31 December 2008 |
6,112 |
Share premium
Additional paid-in capital includes any premiums received on the issuing of the share capital. Any transaction costs associated with the issuing of shares are deducted or set off from additional paid-in capital, net of any related income tax benefits. Equity-settled share-based employee remuneration is also credited to additional paid-in capital until related stock options are exercised.
Statutory reserves
The statutory reserves in SQS AG were created in accordance with Section 150 of the Stock Corporation Act (Germany).
Other reserves
Foreign currency translation differences arise on conversion of the opening reserves of subsidiary undertakings where the functional currency of the subsidiary is not the Euro. This amounts to 1,409 T€ (2007: 248 T€).
IPO costs are accounted for net of taxes in the amount of 1,134 T€ (2007: 1,134 T€).
Retained earnings
Retained earnings represent the accumulated retained profits less losses of SQS Group. Further the dividends have been paid in amount of 4,320 T€ in 2008.
6. Notes to the Cash Flow Statement
The cash flow statement shows how the funds of the Group have changed in the course of the business year through outflows and inflows of funds. The payments are arranged according to investment, financing and business activities.
The sources of funds on which the cash flow statement is based consist of cash and cash equivalents (cash on hand and bank balances).
Cologne, 09 March 2009
SQS Software Quality Systems AG
|
(D. Cotterell) |
(R. van Megen) |
(R. Gawron) |
SQS Software Quality Systems AG
Stollwerckstrasse 11
D-51149 Cologne
Related Shares:
SQS Software Quality Systems AG