sqs software quality systems ag · sqs software quality systems ag sqs. the world’s leading...

Interim results for the 6 Months ended 30 June, 2012

Diederik Vos – designated Chief Executive Officer / Chief Operating Officer René Gawron – Chief Financial Officer

SQS Software Quality Systems AG

SQS. The world’s leading specialist in software quality.

© SQS Software Quality Systems AG | Results for the 6 months ended 30 June 2012 | 2

SQS is the world’s leading specialist in software quality.SQS Group at a Glance

* Source: Nelson Hall, 2012

Independence and Pure Play Testing & QM No.1 worldwide in independent pure play software

testing & quality management services* No. 4 in Europe in software testing services among

leading global system integrators* No. 10 worldwide in software testing services among

leading global system integrators*

PositionSQS positioned as most strategic “Major Player” by leading market research firm

PeopleTeam of more than 2,200 employees

ClientsServing 50% of DAX30, 20% of FTSE 100 and 33% of EuroStoxx50

Services & Methodology More than 30 Services based on our consistent methodology and tools: SQS PractiQ®

AustriaEgyptFinlandFranceGermany IndiaIrelandNetherlandsNorway PortugalSouth Africa SwedenSwitzerlandUnited KingdomUSASpain (Partnership)

Continued growth while significant steps were made for higher profitability going forward.


Above market rate organic revenue growth (+ 9% against software testing market) driven by continued strength in Financial and Retail & Logistics

Key Highlights H1 2012

Stronger earnings performance

Strong operating cash flow improvement despite continuous high working capital consumption

Significantly improved gross margins for Managed Services contracts

Transfer of responsibility to future CEO completed and well received by clients and internal organisation


Financials

EBIT growing threefold the revenue and strongly improved operating cash flow.

Financial Highlights


in €m H1 2012 H1 2011 Change Main developments

Revenue 102.8 95.3 + 7.9% all organic

Gross Margin 30.7% 30.0% + 0.7% major improvement in Managed Services

Adj. EBIT 4.3 3.4 + 23.9%

incl. €1.1m higher recruiting costs, redundancy costs and start up of local US business

Adj. PBT 3.3 2.8 + 18.6% incl. € 0.3m exchange rate losses

Operating cash flow + 3.1 - 1.3 + 4.4m improved invoicing, debtor days at 73.5

Investment cash flow - 1.9 - 3.8 + 1.9m investments back to “normal level”

Net debt (incl. bonded loan) - 14.3 - 16.8 + 2.5m bonded loan of € 3.0m paid back

Managed Services and Specialist Consultancy Services are the focus areas for margin improvements.

Gross Margin Contribution by Business Line


57.4(H1/2011: 59.7)

7.4*(H1/2011: 11.9)

34.0(H1/2011: 17.9)

4.0(H1/2011: 5.9)

102.8(H1/2011: 95.3)

0

40

80

120

Own Consultants Contractors MS Tools / T&C Total

Specialist ConsultancyServices/Regular Testing Services

ManagedServices

Other TotalRevenue H1 2012(€m)

Gross MarginH1 2012

33.0% 20.3% 29.9% 22.9% 30.7%

(H1/2011: 33.5%) (H1/2011: 21.8%) (H1/2011: 24.4%) (H1/2011: 22.2%) (H1/2011: 30.0%)* excl. contractors in Managed Services

188 187 187 187

175181

186 187 187 186 188

70.366.4

62.654.9 53.8

49.9 52.5 50.4 49.9 47.1 48.7

While billable utilization was good, the full costs (incl all overheads) per consultant are below 50k/6 months period.

Key Metrics


Average headcount own consultants

Billable days /own consultants(annualised)

Costs per permanent consultant, excl.contractors / 3rd

party tools

Gross Margin in % 34.5% 34.5% 34.7% 34.7% 29.4% 33.9% 33.2%30.5%

HY2/2007

HY1/2008

HY1/2007

HY2/2008

HY1/2009

HY2/2009

HY1/2010

HY2/2010

HY1/2011

30.0% 31.1%

HY2/2011

HY1/2012

30.7%

630 770 8761,154 1,144 1,153 1,249

1,483 1,618 1,695 1,782

In €m

Net Debt / Cash Development


9.1**

-1.5*

6.0**

-1.3*

10.2**3.1*

FY 2009 H1 2010 FY 2010 H1 2011 FY 2011

Operating cash flow of period

Net cash

Net debt (incl. bonded loan)

-1.4

-9.2-7.5

-16.8-12.3

-14.3

Includes €3m investment in India test centre * 6 months

** 12 months

Net debt expected to reduce through better payment terms on MS contracts and currently no investments on facilities.

H1 2012

incl. bonded loans

41%

27%

14%

7%7% 4%

28%

24%

12%11%

8%

5%

4%2%2%2%

Geo-graphies

USA/RSA/India

Other European

Germany

UK/Ireland

Switzerland

Nordic

81.6% 14.4%

2%2%Services

with permanent consultants

Software Testing Products

Training & Conferences

Contractors

SQS generates 90% of its revenues in the defined six focus industries.

SQS Segments and Vertical Markets


55%

8%

33%

2%2%

Managed Testing Services

Testing in projects and QM consultancy

Software Testing Products


Segments

Management Consulting

Telecommunication

Financial

Government & Public

Insurance

Manufacturing

Electronics/Equipment

Energy & Utilities

Retail & Logistics

Industries

Gaming/Gambling (1%)

H1 2012Revenue€ 102.8 m+7.9% YoY

Resources

Media & Entertainment

Health/Pharma/Medical & Food

Defence (1%)

Focusverticals


Market, Strategy and Outlook

11

Moving software testing to a competitive global industry.

Business

Build on SQS’s position as the world’s leading specialist software quality services supplier

Prepare SQS for the next growth phase (organic and acquisitive) up to a revenue of €500m, both in new and existing markets

Respond to clients expecting efficiency, transformation or quality solutions by having a stronger business segmentation: Managed Services (MS), 40% of total Specialist Consultancy Services (SC), 25% of total Regular Testing Services (RTS), 35% of total

Focus on six key industries in which SQS has strong domain, application and technology expertise

Build out local USA business Extend into software product testing and certification

Agenda of the New CEO (I)

© SQS Software Quality Systems AG | Results for the 6 months ended 30 June 2012 |

12

Moving software testing to a competitive global industry.

Operations

Improve profit margins by strong focus on Value based pricing Invest in our people’s skills Staff utilization Right mix of onsite/test centre delivery Alignment of overhead costs

Run test centres as “factories” (efficient, repeatable) Improve operating cash flow and reduce net debt position Enhance talent and career management to develop those skills required

today and in the next 2-3 years

Agenda of the New CEO (II)

© SQS Software Quality Systems AG | Results for the 6 months ended 30 June 2012 |

Cooperative leadership by global senior management team Client satisfaction Responsibility Integrity and honesty Passion for quality

Values

SQS targets to be involved in all major software transformation projects.

Transformation Programme


2012

Software quality management & testing

Consolidate market verticals

Cut back on small deals

Focus servicesportfolio

Main presence in Europe

2,200 employees

PGP* 2014/2015

Shaping and driving the most challenging business software change initiatives

Deliver services in six key verticals and certification

Minimum deal size € 1.5m per year

Focus on six core service offerings

Expand to US and make selected acquisitions

Grow headcount to 5,000

Objectives by 2017

Grow faster than market

Improve gross margin by 4%

Reduce overhead costs by 4% of revenue

Start presence in APAC

Headcount of 8,000 to 10,000

*Profitable Growth Plan

Specialist testing services spending grows three times faster than testing as a part of system integrator deals.

Specialist (stand alone) testing services

Software Testing Services Market


Source: Nelson Hall 2012

Change per year 2012 2013 2014

North America + 4% + 12% + 13%

Europe - 1% + 9% + 10%

Rest of World - 3% + 7% + 9%

Highest growth rates expected in Financial Services, Energy & Utilities, Manufacturing

Lowest growth rate expected in Public

4,150 (48%)

3,450 (40%)1,000

(12%)

2012, in $mTotal: 8,600

North America

EuropeRest of World

58%17%

15%

8%

Efficiency clients

Transformation clients

Revenue seekers

Quality-driven clients

Total:33,400

m$

Client’s buying motivation World market testing services

SQS is the pure play market leader. Including system integrators it is no. 4 in Europe and no. 10 worldwide.

Worldwide Competitive Landscape


Pure Play Test Specialists

Source: Nelson Hall Report, 2012; SQS, based on estimated or published 2011/2012 revenue figures

(€m) (€m)

System Integrators (testing part only)

System Integrator/IT Services Group, not independentIndependent Testing/QM Provider

20025 50 1000

> 200mSQS

Tesnet 12

Quality House 9

ps-testware 7

Plan IT 25

Acial 12

10Maverick

13FHG/IESEMTP 15

Imbus

12Amsphere

Squerist 6Assurity 5

Genilogix 7

6

5

Experior

KJR

0 150 300

Cap Gemini570

SQS >200

TCS560

480Infosys

Accenture660

600

Wipro 440

75

Mahindra 200

260HP

185CSC

10QA Infotech

IBM 480

Cognizant 440

20

12Chakkilam

Keytorc

Thinksoft 18

RTTS 9

7 Amdocs

Atos 150

185

UST Global 75

Qualitest 30

CGI (Logica) 295

Inspearit 22

Continue to focus on higher margin business Strategy is for Managed Services business to account for over 40% and Specialist

Consultancy Services business to account for 25% of total revenue Value pricing to ensure appropriate revenue from higher value services Expand services into high margin product testing and certification markets

Focus on larger engagements and improving value from existing customers Minimum engagement size of €1.5m revenues per annum

Target the six core industries Focus on those six in which we have domain and technology expertise

Continue to exercise caution regarding the general economic outlookConfident of meeting full year expectations

Outlook


Improving profitability through focus on core strengths, higher margin business and pricing

Appendices



SQS services follow the software life cycle.SQS Business Model

ManagementConsulting

Plan6 months – 1 year

Build1 – 2 years

RunTypically 10 years or more

Testing ConsultancyServices

Managed Servicesfor Software Testing


Software Testing Products / PractiQ® MethodologySQS

Serv

ices

&

Pro

duct

sSo

ftwar

e Li

fe C

ycle

188 187 187 187

175181

186 187 187 186 188

7.3 7.9 7.4 4.2 3.3 5.0 5.9 8.0 11.8 9.6 12.8

44.3 51.1 54.8 63.3 61.5 57.565.6

74.880.7 79.8

86.74.65.8 6.7

6.52.7 4.3

2.4

6.32.8 4.4

3.3

The business has grown significantly over the past few years.

Key Metrics


Average headcount own consultants

Billable days /own consultants(annualised)

PBT (adj.)

Other Costs

In m €

Contractors’ costs / 3rd party tools

Revenue

Gross Margin in %

56.264.8 68.9

74.067.5 66.8

34.5% 34.5% 34.7% 34.7% 29.4% 33.9% 33.2%

89.0

30.5%

73.9

HY2/2007

HY1/2008

HY1/2007

HY2/2008

HY1/2009

HY2/2009

HY1/2010

HY2/2010

HY1/2011

30.0%

95.3

31.1%

93.8

HY2/2011

HY1/2012

30.7%

630 770 8761,154 1,144 1,153 1,249

1,483 1,618 1,695 1,782

102.8

Onshore/Offshore Split ConsultantsPermanent Billable Employees

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2006 2007 2008 2009 2010 2011 H12012

Billable test centres staff now at 42% of total billable headcount.

Billable Staff


Onsite Consultants Offshore Consultants

570

1,062

9%22% 26% 31% 32% 31%

7% 10% 11%

91%

78% 74%62% 58% 58%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 H1 2012

6%

* incl. all test centres

Nearshore test centres (Goerlitz and Belfast)

Onsite Consultants Offshore Consultants

Nearshore test centres (Goerlitz and Belfast)

42%*

194

5%


Profit & Loss Statement

in €’000 H1 2012 H1 2011 V% 2011in % of sales in % of sales HY 1 2012/2011 in % of sales

Revenue 102,810 95,280 7.9% 189,103

Gross Profit 31,520 30.7% 28,557 30.0% 10.4% 57,691 30.5%

G&AS&MR&D

17,7917,8781,600

17.3%7.7%1.6%

16,0427,3921,695

16.8%7.8%1.8%

10.9%6.6%

-5.7%

31,23614,2863,544

16.5%7.6%1.9%

EBITDADepreciation

7,0042,754

6.8% 6,0202,591

6.3% 16.36.3

14,4675,842

7.7%3.1%

Adj. EBIT 4,250 4.1% 3,429 3.6% 23.9% 8,625 4.6%

Net interest financialExchange rate loss

- 595-314

- 552-59

- 1,107-264

Adj. PBT 3,341 3.2% 2,818 3.0% 18.6% 7,254 3.8%

IFRS regular amortisation on acquisitionsIFRS pro forma interest on acquisitions

- 779- 26

- 779- 82

0.0%-68.9%

- 1,557- 77

PBT 2,537 2.5% 1,957 2.1% 29.6% 5,620 3.0%

Taxes - 549 - 465 18.1% - 1,404

Profit after taxes 1,988 1.9% 1,492 1.6% 33.2% 4,216 2.2%

Healthy top line growth, improved profitability, higher accruals shown under G&A.


Balance Sheet

in €’000 H1 2012 H1 2011 YE 2011

Assets Non current assets 65,923 65,044 66,740GoodwillIntangible assetsOther assets (e.g. fixed assets)

49,1128,4858,326

47,50010,3007,244

48,4189,6208,702

Current assets 61,543 57,320 61,042CashTrade receivables Work in progress (WIP)Other receivables

6,72240,13310,2824,406

6,68036,4668,1885,986

9,27040,3967,6223,754

Total assets 127,466 122,364 127,782

Equity and Liabilities Current liabilities 36,789 38,411 39,014Bank loans & overdraftsBonded loanTrade creditorsShort term liabilities for acquisitionsOther short term liabilitiesTax accruals and liabilities

9,1710

6,0040

15,4316,183

8,4732,9956,456

89114,3175,279

6,6593,0005,470

017,2926,593

Non current liabilities 19,921 18,442 19,986Bank loansLong term liabilities from acquisitions Other non current liabilities

11,8752,0406,006

12,0001,6404,802

11,9372,0825,967

Equity/Net Assets 70,756 65,511 68,782

Total liabilities 127,466 122,364 127,782

Receivables and WIP represent 73.5 debtor days (72 at H1 2011).


in €’000 H1 2012 H1 2011 2011

Net cash flow from

Operating activities 3,114 - 1,326 10,176

Interest payments Tax payments / exchange rate movements

- 664- 789

- 636- 307

- 1,366- 2,249

Current business activities 1,661 - 2,269 6,561

Acquisition and capitalization of tangible / intangible assets (w/o goodwill)Acquisition / disposal of subsidiariesForeign currency result / interest received

- 2,001

69

- 3,854

47

- 9,106

183

Investment activities - 1,932 - 3,807 - 8,923

Increase in share capital / dividendsRedemption of finance loansIncrease of finance loansRedemption / termination of leasing contracts

- 1,395- 3,062

2,512- 254

- 2,231- 1,26112,505

- 494

-2,231-2,40811,775

178

Financing activities - 2,199 8,519 7,314

Acquired cash and cash equivalents - 78 - 59 22

Cash at beginning 9,270 4,296 4,296

Cash at end 6,722 6,680 9,270

Strongly improved operating/business cash flow, reduced investments and debts paid back.

Cash Flow Statement


Adj. EPS only moved up by 3.9% due to a return to normalised tax rates (24%) in local GAAP.

EPS FY 2011

in €’000 H1 2012 H1 2011 Change 2011

PBT reported 2,537 1,957 29.6% 5,620

IFRS regular amortisation on acquisitions & otherIFRS pro forma interest on acquisitions & otherTaxes on income of operations local GAAP

77926

- 789

77982

- 366

1,55777

- 2,360

Profit after taxes adjusted 2,553 2,452 4.1% 4,894

Weighted average number of shares undiluted 27,893,289 27,844,245 27,868,969

EPS adjusted in € 0.09 0.09 3.9% 0.18

Order intake of €30.4m mostly from contract extensions with order backlog of c. €60m going forward.

Managed Services Order Backlog


2009 2010 H1 2012 2013 20142011

Order intake Revenue Order backlog

€10m

€4m

€51m

€17.6m

c. €30m

c. €20m

c. €10m

€42.2m

€66.5m

€34.0m

H2 2012

€60.1m

€30.4m

There are no pending earn-out obligations to be satisfied in shares.

Actual and estimated weighted number of shares:

Number of Shares


2009 26,242m shares (actual)



2012 28,000m shares (forecast)

2013 28,000m shares (forecast)

Paid a dividend of €0.05 per shareDividend


Earnings per share Adj. EPS for 2011 was €0.18 per

share

Dividend SQS has paid a dividend

of €0.05 per share for its 2011 financial year (€0.08 for 2010)

German companies pay dividends once a year

SQS dividends are paid following the AGM at the end of May each year

In the future SQS proposes to continue to pay a dividend of approx. 30% of PAT

Our largest institutional shareholders hold about41% of SQS’ issued shares.

Institutional Shareholders


Octopus Investments 9.6%J.O. Hambro Capital Mgmt. 9.3%Herald Investment 7.3%Legal & General 3.9%

Charles Stanley 2.8%

British Airways Pension Fund 2.0%

Barclays Private Bank 1.1%Cavendish 1.0%Hargreaves Lansdown Stockbrokers 0.9%South Yorkshire Pension 0.8%TD Direct Investing 0.7%TechInvest 0.6%Davy Stockbrokers 0.5%Halifax Share Dealing 0.5%Sub-Total 41.0%

Major Institutional Shareholders > 0.5%

Source: Westhouse 8/2012

SQS Software Quality Systems AGStollwerckstraße 11 | 51149 Cologne, GermanyPhone: +49 22 03 91 54-0 | Fax: +49 22 03 91 54-15E-Mail: [email protected]: www.sqs.de | www.sqs.com

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