Significant increase in cost of revenues • The cost of revenues rose from € 345.4 million in the pre vious year to € 370.4 million in 2014. This increase, accompanied by a reduction in revenues, was chiefly driven by the rise in personnel expenses by € 22.8 million to € 88.2 million. In antici- pation of future growth, QSC had significantly expanded its capacities, especially in Direct Sales, into 2014 and, in the case of some large-scale outsourcing projects, had also taken over emplo- yees from customers.
Moreover, the costs of building, operating and maintaining QSC’s own infrastructure rose by € 11.7 million to € 49.5 million in 2014. This increase was chiefly due to the expiry of an item within de- ferred income and accrued expenses (“TELE2 item”). The reversal of this item in the fi nancial years from 2011 to 2013 benefited QSC to the tune of € 20.9 million a year. This item had been recog- nised in connection with the exit of the former Plusnet co-shareholder TELE2. Due to continuing performance obligations, QSC had credited the payment made upon this exit to earnings over a period running to the end of 2013. The expiry of this item did not impact in its full amount on cost of revenues, as QSC simultaneously benefited from further savings resulting from a long-term contract with another network operator concerning the optimisation of TC infrastructure. Within cost of revenues, the single largest line item in 2014 as well was cost of materials. These revenue-dependent costs reduced by € 10.9 million to € 189.4 million. Increased cost of revenues accompanied by lower revenues led gross profi t to reduce by € 49.3 million to € 61.0 million in 2014.
Success with sales and administrative expenses • QSC achieved a further reduction in its sales and marketing expenses to € 39.5 million in the past financial year, down from € 47.7 million in 2013. This line item essentially comprises personnel expenses, commission payments, adverti- sing expenses and depreciation. While advertising expenses increased slightly, the other compo- nents fell short of the previous year’s fi gures. QSC paid less commission to resellers in particular and also managed to reduce its sales-related personnel expenses.
At € 38.3 million, general and administrative expenses also fell short of the previous year’s fi gure of € 39.0 million. The significant reduction in personnel expenses in this area as well was coun- tered by an increase in depreciation.
Savings thanks to long-term agreement with network operator
One-off restructuring provisions of € 7.2 million • In view of its unsatisfactory earnings perfor- mance, QSC began work in 2014 on compiling a cost-cutting and focusing programme. Further information about this can be found in the Outlook from page 68 onwards. QSC recognised provi- sions totalling € 7.2 million in its 2014 consolidated fi nancial statements for the expenses ex pec- ted in con nection with the planned reduction in staff totals. A majority of these expenses relate to cost of revenues.
Earnings strength of operating business • QSC’s operating earnings strength can be better un- derstood if, by analogy with the quarterly reports, depreciation, amortisation and non-cash com- pensation components are reported separately in the income statement. Consistent with IAS 1, these figures are therefore a component of the individual cost items. The following abridged in- come statement presents depreciation and amortisation as a separate line item:
EBITDA margin of 10 percent before restructuring expenses • In 2014, the Company’s EBITDA was substantially affected by higher cost of revenues and restructuring provisions on the one hand and lower revenues on the other hand. EBITDA amounted to € 35.0 million, as against € 77.8 mil- lion in the previous year. Prior to restructuring provisions, this key fi gure amounted to € 42.2 mil- lion. The EBITDA margin came to 8 percent, or to 10 percent prior to restructuring.
Depreciation and amortisation decreased by € 0.3 million to € 51.0 million in the 2014 financial year. Furthermore, an impairment loss of € 18.0 million was recognised on goodwill in the Re- sellers segment. Fur ther information about this can be found in Note 16 of the Notes to the Con- solidated Financial Statements.
* Excluding depreciation / amortisation and non-cash share-based remuneration
€ million 2014 2013
Revenues 431.4 455.7
Cost of revenues * (327.1) (303.5)
Gross profi t 104.4 152.3
Sales and marketing expenses * (37.8) (41.8)
General and administrative expenses * (32.3) (35.6)
Other operating income 1.1 3.4
Other operating expenses (0.3) (0.5)
EBITDA 35.0 77.8
Depreciation /amortisation
(including non-cash share-based remuneration
and impairments of customer-related inventories) (51.0) (51.3)
Goodwill impairment (18.0) -
Operating earnings (EBIT) (34.0) 26.5
SEE PAGES 68f. OUTLOOK
SEE PAGES 117ff. NOTES
Net of depreciation, amortisation and impairment losses, operating earnings amounted to € -34.0 million in 2014, compared with € 26.5 million in the previous year. Due to the taking up of the pro missory note loan, the fi nancial result of € -6.2 million fell short of the previous year’s fi gure of € -3.8 million. Earnings before taxes on income therefore came to € -40.1 million, as against € 22.7 million in 2013. Given tax income of € 6.2 million, consolidated net income therefore totalled € -33.9 million, compared with € 23.6 million in 2013. Basic earnings per share came to € -0.27, as opposed to € 0.19 in the previous year.
When comparing these earnings fi gures, four factors should chiefl y be considered: Firstly, QSC no longer benefited from the positive TELE2 payment write-back of € 20.9 million a year. Second ly, increased personnel expenses within cost of revenues were not compensated for by correspon- ding revenues in 2014. Thirdly, the financial statements as of 31 December 2014 include restruc- turing provisions of € 7.2 million. Fourthly, in view of the downturn in its Resellers business unit QSC recognised goodwill impairment losses of € 18.0 million.