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About Us > Press > Archive

Regulatory Announcement

RNS Number:6061I
SQS Software Quality Systems AG
07 September 2006

Embargoed until 0700                                                                                         Thursday, 7 September 2006     

SQS Software Quality Systems AG

Interim Results
For the six months ended 30th June 2006

SQS Software Quality Systems AG (AIM:SQS.L) the leading independent pan-European provider of quality management and testing services for software development, today announces its interim results for the six months ended 30th June 2006.


Financial Highlights:

For further information please contact:

SQS Software Quality Systems AG                               www.sqs.de or www.sqs-uk.com
Rudolf van Megen (CEO)/Rene Gawron (CFO)         +49 (2203) 91 54 0

Evolution Securities Limited                                           020 7071 4300
Jeremy Ellis / Mike Read

Smithfield                                                                           020 7360 4900
Sara Musgrave

Print resolution images are available for the media to view and download from www.vismedia.co.uk.

Notes to Editors:

SQS is the largest independent European provider of 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 operations across Europe and in South Africa with over 700 employees. SQS has a strong presence in Germany (Cologne, Munich, Frankfurt, Stuttgart and Hamburg) and in the UK (London, Woking, Birmingham), Ireland, Netherlands, Switzerland, Austria and South Africa. SQS also has a minor stake in an operation in Portugal and a partnership operation in Spain.

In May 2006, SQS made its first acquisition after its AIM flotation, buying Cresta Group Ltd in the UK for a consideration of up to £18m. The acquisition increased SQS' UK revenue threefold and secured its position as the largest independent software testing and quality management company in the UK. With over 3,000 completed projects under its belt, SQS has a strong customer base including half of the DAX 30 companies and 30% of the STOXX-50. They include names like Dresdner Bank, Lloyds TSB, Deutsche Telekom, Vodafone, Daimler Chrysler, and Airbus spread across the full range of industries. SQS is the first Germany company with a primary listing on AIM and completed its IPO in September 2005, having raised £10.8m before expenses at an issue price of 190p. SQS is included in the Software and Computer Services sector (9530) within the Computer Services subsector (9533) and has a RIC code of SQS.L. SQS completed a secondary listing on the Deutsche Boerse in Frankfurt on 2nd December 2005. For further information, please visit www.sqs-uk.com.


Chief Executive's Statement

Introduction

I am pleased to present SQS's first set of interim results following its admission to AIM in September 2005. SQS has had a strong first half, recording a material increase in revenues across the Group. This improvement resulted purely from organic growth in our core businesses, both by extending contracts with existing clients and from 26 new client wins achieved in the period. The first half of 2006 was also a period of investment when we increased the number of consultants by 55, bringing the total to 383. We expect these consultants to make a positive contribution in the second half of the year. In particular we are securing additional business in the area of software testing of embedded systems, in both the avionic and automotive industries, and in insurance.

Turnover from continuing operations rose by 18.5% to €31.50m (HY1 2005: €26.58m) while underlying profit before tax increased by 2.4% to €1.70m (HY1 2005: €1.66m), constrained by the training costs associated with the investment in new consultants (approximately €1.0m in opportunity costs). Although the investment in new consultants has impacted our gross margin in the first half of the year they are expected to fully contribute to gross margin generation in the second half of 2006.

The gross profit improved to €10.16m (HY1 2005: €9.53m), despite continued pricing pressure and investment in new consultants. Geographically we saw the strongest turnover growth in Switzerland where the top line grew by 50.2%, followed by Germany which saw 17.7% growth. In the United Kingdom, the consolidated revenues were flat; however, revenue derived by UK resources increased by 11% as a number of UK consultants were allocated to a large strategic project in Switzerland which accounted for €0.5m of revenues. Adjusted EPS (adjusted for deferred taxes and IFRS tax differences) of €0.10 rose by 11.1% (HY1 2005: €0.09).

The balance sheet strengthened considerably during the period reflecting the benefit of the €14.1m net proceeds from our admission to AIM in September 2005 and the positive net income in the first half of the year. We further reduced our borrowings by €8.6m to €6.4m (HY1 2005: €15.0m). Cash balances at the six months period end stood at €0.3m (HY1 2005: cash €0.1m). The acquisition of Cresta required us to show €4.4m of cash recorded under other receivables which was a notary account as cash consideration for the Cresta acquisition, whose completion occurred a few days after the six months period end.


Dividend

No dividend will be paid in respect of the interim results, however the Board intends to pursue a progressive dividend policy in future and therefore intends to pay a final dividend for the year ending 31st December 2006.


The Board

There have been no changes to our supervisory board and management board in the last six months period.


Strategy

Our strategy is to strengthen our market position as the leading independent pan-European provider of quality management and testing services for software development. We aim to grow our business with long term outsourcing contracts and investment in expanding markets such as embedded systems in the aircraft manufacturing and automotive industries. We intend to strengthen our position in a number of key European markets and will continue to actively look for acquisitions to support and accelerate this strategy.


Employees

On behalf of the board, I would like to thank all our employees for their contribution, hard work, and excellent support during the year. I also welcome the many new employees who have joined our company to contribute with their rich talents to our growth strategy. I am confident that we have the team in place to capitalise on the opportunities available and to enable us to deliver long term shareholder value.

A stock option programme which will be executed within the next two months will help SQS retain key employees and attract quality individuals into the business. As a result of the acquisition of Cresta, SQS now has a training facility based in South Africa which is to be used for new employees. We believe that our ability to provide first class training will be a crucial part of attracting new employees to the business.


Outlook

During the year, SQS strengthened its position as the leading independent pan-European provider of quality management and testing services for software development and once again accelerated its growth rate, now at more than three times the rate of the European IT services market.

In the second half of 2006, we will continue to grow the business organically, focusing on expanding growth markets such as outsourcing and embedded systems, whilst consolidating the contribution from the Cresta acquisition. Trading has been encouraging in the first two months of HY2 2006, and as expected, growth is well ahead of the comparable period last year while the new business pipeline remains strong.

Rudolf van Megen
Chief Executive Officer
6th September 2006



Business and Financial Review

During the first half of 2006, we continued to strengthen our business through strong organic growth and repeat revenues. Client numbers now stand at 280, following 26 new account wins in the period. We accelerated our investment programme of consultants and further reduced our overheads relative to sales at stable utilisation rates. Although the investment in new consultants has impacted our gross margin in the first half of the year they are expected to fully contribute to gross margin generation in the second half of 2006. The acquisition of Cresta Group Ltd., which will be consolidated from July 2006 onwards, has reduced our high exposure to the German market and moved us to the clear market leadership in our field in the United Kingdom.


Strategic Update

Market drivers

Software quality management and testing constitutes a segment of the IT services market and therefore growth in the IT services market closely correlates with growth in software quality management and testing. Research conducted by International Data Corporation ("IDC") in 2006 shows that the European growth rate for IT services is expected to be approximately 5.0% in 2006, of that the UK is forecast to grow 5.2% with Germany growing 4.0%. In HY1 2006, SQS achieved 18.5% growth thus more than three times that rate.

As proven by the Standish Group studies since 1994, there are still 71% of worldwide IT projects either failing or falling behind time and budget. This is a key driver for the growth in the independent third party quality management and testing market and the second opinion that companies such as SQS provide helps to improve the success rate of IT projects. Other market drivers include the increasing complexity of software and IT systems and higher regulatory demands imposed on IT systems by requirements such as the Sarbanes Oxley Act. In addition, continuing return on investment (ROI) pressures, coupled with increasing "industrialisation" of the software engineering process has led to an increased demand for outsourced software testing as well as better quality management of embedded systems.


Strategic Goals

The SQS Group strategy builds on five strategic goals which all contribute to market leadership as a service company and resulting shareholder value. These are:

Services and product lines

The successful SQC conferences (Software and Systems Quality Conferences), held in Germany and the UK are two of the largest quality management and software testing events in Europe. We have expanded these into Switzerland this year, where the first SQC conference will be held in September 2006. The media alliance with one of Europe's most influential publishers, IDG Communications (e.g. "Computerwoche" in Germany) has resulted in an increase in the number of delegates, exhibitors, and sponsors attending our German and Swiss conferences in 2006.


Geographic review

Germany
Revenue in Germany was €20.27m (HY 2005: €17.22m), an increase of 17.7%, contributing 64% to the Group's total revenue compared with 65% in the prior period. We intensified our hiring activities in the first half of 2006 in order to grow the local business in Germany significantly in the current year. Profits have been impacted by the number of non-fee earning consultants as we increased the headcount and trained our new employees although this is expected this to pay off in the second half of the year. During the first half, we secured key contract renewals with all our large clients. We also increased the business base in embedded systems by 33% to €2.4m (HY1 2005: €1.8m) which to a large extent is business with German based aircraft manufacturers and automotive clients.

Switzerland
In Switzerland revenues were at €4.99m (HY1 2005: €3.32m), an increase of 50.3%. We won additional clients in banking and insurances in Switzerland. Furthermore we built a new service line which has been marketed as "SQS Group Business Consulting," focusing on bridging the gap between customers' business and IT-departments with project and risk management services.

United Kingdom
UK revenues were €4.43m (HY1 2005: €4.48m), 14% of the Group's total. Although these consolidated numbers are flat year on year, revenues generated by UK staff increased by 11% as they contributed to €0.5m of turnover generated in Switzerland that could not otherwise have been set up successfully. The Cresta Group Ltd. acquisition will only be consolidated in the last six months of 2006 and is expected to more than triple our UK business.

Other European Countries
The business in Austria and the Netherlands generated €1.82m (HY1 2005: €1.56m) which was an increase of 16.7%.



Financial Review

Profit before tax was €1.70m (HY1 2005: €1.66m), up 2.4%. Profit was constrained by the training costs of 55 new consultants (during HY1 2005: 20 new consultants) which on average each had 1.5 months of training before they became fully billable. Their direct costs were fully expensed in the gross margin and have impacted the margin with €1.0m in opportunity costs. In order to facilitate further growth and improved margins in the full year, such investments were necessary in the first half of the year. A higher than average number of holidays were taken by consultants in June 2006 due to The World Cup in Germany which has shifted approximately €0.3m of revenue and pre-tax profits from June to Q3 2006. Adjusted* earnings per share improved to €0.10 (HY1 2005: €0.09).

*based on net income increased by €0.4m deferred taxes and IFRS tax differences on capitalised R&D but including actual profit taxes of €0.2m payable under local GAAP


Costs

Administrative costs totalled €4.71m (HY1 2005: €4.40m) and represented 15.0% of sales (HY1 2005:16.6%). This reduced from the same period last year due to more centralised use of overheads in an enlarged company. Sales & marketing costs were €2.1m and grew relative to turnover (to 6.7% from 6.3%) as SQS continued to invest in additional sales resources to support current and future organic growth of the business. Research and development costs of €1.4m fell as a proportion of turnover (to 4.5% from 5.0%), as these efforts for tool and course development for our training products remain stable in absolute terms irrespective of the overall revenue growth. In total overhead costs relative to sales were reduced to 26.2% from 27.9% in HY1 2005.


Taxation

The Group tax charge of €0.6m has two components; one is tax on profits payable under local GAAP of €0.2m, and the other is the deferred tax and tax differences that SQS is required to show under IFRS of €0.4m. Due to tax breaks in Germany under local GAAP, SQS will pay no or negligible taxes on profits in Germany, Austria and the Netherlands. The remaining €0.2m tax on profits arose in the UK and Switzerland. Deferred tax and IFRS tax differences were €0.4m on capitalised R&D costs.


Cash Flow and Financing

Cashflow for the period was neutral, compared to an inflow of €1.2m in 2005. Operating cash flow was negatively impacted in 2006 by an increase of €2.3m in receivables, partly due to an increase in debtor days to 70 from 69 at end June 2005.

Cash outflow from financing activities was €0.3m compared to an outflow of €0.8m in 2005, mainly due to the repayment of finance loans. Cash inflow from investments was €0.1m against an outflow of €0.9m last year. This figure includes an outflow of €1.0m for capitalised R&D for products and investments in intangible assets (HY1 2005 comparable was an outflow of €0.8m), the sale of €5.6m in marketable securities and €4.4m, which was a payment on a notary account for the cash consideration of Cresta Group Ltd.. This completed on 3 July 2006 after the balance sheet date.


Foreign Exchange

Approximately 70% of the Group's turnover is generated in Euros. With the exception of SQS UK Group Ltd and Software Quality Systems (Schweiz) AG, all subsidiaries of SQS are located in the currency area of the Euro. For the conversion of the local currency into Euros, the official fixed exchange rate was chosen. For the conversion of the balance sheet items from foreign currency into Euros, the official mean rate as at 30th June 2006 was used.

The Group's exposure to foreign exchange risks is negligible as more than 90% of the business is billed and served locally.


Amortisation

Amortisation of goodwill is no longer carried out due to the changed IFRS accounting rules. On account of the high amortisation of these goodwill values in previous years, their book values today lie considerably below the original acquisition costs. No reduction in value was necessary by reason of the impairment tests carried out in accordance with IAS 36.


International Financial Reporting Standards (IFRS)

The Interim Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group") are prepared in conformity with all IFRS Standards (International Financial Reporting Standards, formerly IAS = International Accounting Standards) and Interpretations of the IASB (International Accounting Standards Board) which are mandatory at 30 June 2006, whereas the interim reports are published in an abbreviated form according to IAS 34. The same accounting and valuation method used for the 2005 annual Consolidated Financial Statements was applied. The Interim Consolidated Financial Statements have neither been audited nor reviewed.

The SQS Group Consolidated Financial Statements for the six month period ended June 30th 2006 were prepared in accordance with uniform accounting and valuation principles in Euros.


Rene Gawron
Chief Financial Officer
6th September 2006


Consolidated Profit and Loss Account
Six months ended 30 June 2006

Consolidated Balance Sheet
As at 30 June 2006 (IFRS)

Consolidated Cash Flow Statement
Six months ended 30 June 2006 (IFRS)

1. Summary of Significant Accounting Policies

Basis of preparation

The Interim Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group") are prepared in conformity with all IFRS Standards (International Financial Reporting Standards, formerly IAS = International Accounting Standards) and Interpretations of the IASB (International Accounting Standards Board) which are mandatory at 30 June 2006, whereas the interim reports are published in an abbreviated form according to IAS 34. The same accounting and valuation method used for the 2005 annual Consolidated Financial Statements was applied. The Interim Consolidated Financial Statements have neither been audited nor reviewed.

The Financial Information has been prepared on the historical cost basis. Further information about the Group's accounting principles and policies is contained in the SQS Consolidated Financial Statement at 31st December 2005. 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.


Consolidated Companies

As at 30 June, the Company held interests in the share capital of more than 20 % of the following undertakings:

3 % of the shares in Software Quality Systems (Schweiz) AG are held for legal reasons by members of the board of this entity in accordance with the interests of SQS.


Use of estimates

The preparation of the Interim Financial Statements in compliance with the International Financial Reporting Standards requires the disclosure of assumptions and estimates made by the management which have an effect on the amount and the presentation of the assets and liabilities shown in the balance sheet, the income and expenditure as well as any contingencies. The actual results may deviate from these estimates.

There were no changes in accounting estimates and assumptions reported in the prior financial year.



2. Segmental reporting

The following tables present revenue and profit information regarding the SQS Group's business segments for the interim period ended 30 June 2006 and 30 June 2005 and for the year ended 31 December 2005.

2. Segmental reporting (continued)

3. Expenses

The Consolidated Income Statement presents expenses according to function. Additional information concerning the origin of these expenses, by type of cost, is provided below:


Cost of material

The cost of material in the interim period ended 30 June 2006 amounted to T€ 3,552 (at mid-year 2005: T€ 2,056). Cost of material relates mainly to the procurement of external services such as contract software engineers. In addition, certain project-related or internally used hardware and software is shown under cost of material.


Employee benefits expenses

The expenses for retirement benefits include the change in pension accruals and other retirement provisions such as direct insurance and provident fund costs.


Depreciation

Depreciation charged in the interim period ended 30 June 2006 amounted to T€ 1,016 (at mid-year 2005: T€ 865). Of this, T€ 803 (at mid-year 2005: T€ 590) was attributable to the amortisation of development costs.



4. Financial result

The financial result is comprised as follows:

4. Financial result (continued)

Finance income results from fixed deposit investments and investments in securities maturing in the short term which yield interest income, or securities negotiable at short notice. Interest payable relates to interest on bank liabilities and on the convertible bonds. Finance income and expenses are stated after foreign exchange rate gains and losses.



5. Taxes on earnings

The line item includes current tax expenses in the amount of T€ 172 (previous interim period: T€ 233) and deferred tax expenses in the amount of T€ 432 (previous interim period: T€ 395).

Further information about the recognition and measurement of the income tax is contained in the SQS Consolidated Financial Statements at 31 December 2005.



6. Earnings per share

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

Undiluted earnings per share are calculated by dividing the profit for the six month period attributable to equity shareholders by the weighted average number of shares in issue during the six month period ended 30 June 2005: 10,142,503 after adjusting for the impact of changes in the issued share capital in each year and of a 1.4:1 bonus share issue on 16 August 2005.

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.

Adjusted earnings by share were calculated by adding back deferred taxes and IFRS tax differences as well as IPO costs to the profit, divided by the number of shares issued as at 30.6.2006 (15,763,080 shares).



7. Intangible assets

The item is comprised as follows:

Development costs were capitalised in the interim period ended 30 June 2006 in the amount of T€ 1,010 (31 December 2005 T€ 2,415) and amortised over a period of 36 months, since the conditions under IAS 38 were fulfilled.

The amortisation of development costs is contained 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.



8. Property, plant and equipment

The development of the tangible assets of the SQS Group is presented as follows:

9. Marketable securities and cash and cash equivalents

Cash and cash equivalents comprise cash and credit balances at banks which can be realised in the short term and which earn commercial rates of interest. The development of cash and cash equivalents is presented in the Consolidated Cash Flow Statement.

The portfolio of marketable securities of the SQS Group contains investments in money market funds, fixed interest securities and shares. They are held available for sale.

The valuation of the securities is made at the attributable current value on the basis of the market rates at the balance sheet date. Changes in the attributable values are recorded directly in equity.

During the interim period ended 30 June 2006 all marketable securities classified as available for sale were sold. The total losses of T€ 34 that has been recorded in shareholders equity as the net gains/losses on available for sale securities at 31 December 2005 were recognised in the result for the interim period.



10. Bank loans, overdrafts and other loans

The finance liabilities are comprised as follows:

The current liabilities to bank are secured on the assets of the Company and those of its subsidiary undertakings.

As security for the long-term bank loan, the shares in SQS Group (UK) Ltd. were pledged in a pool contract jointly for the lenders. Furthermore, under an assignment agreement all current and future trade receivables of SQS Software Quality Systems AG were assigned to Deutsche Bank AG for and on behalf of the syndicate.



11. Other creditors

The item is comprised as follows: