SQS Software Quality Systems AG

SQS Software Quality

Systems AG

Preliminary results for the year ended

31 December 2007

SQS Group and Strategy

„

SQS Group – an overview

„

Strategic priorities for 2007 – a reminder

Financials

„

Profit & Loss statement

„

Balance sheet

„

Cash Flow statement

„

Dividend policy

„

Financial results summary

SQS in the market

„

Market

„

Clients

Strategic summary and outlook

Agenda

SQS is the global leader in independent software testing

and quality management services.

„

26 years of prosperous operations

„

Over 4,000 successfully completed projects

„

Growing 4-5 times faster than the IT services market growth rate

„

The customer base includes 36 FTSE-100 companies, half of the DAX 30 companies

and nearly a third of the STOXX-50 companies

„

The SQS philosophy is to make

IT projects successful

SQS Group at a glance

Business

Demand

Rollout

Testing

Specification

Design

Coding

Acceptance

Ind

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Qual

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Int

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–

SQS strategic priorities for 2007 – a reminder

„

Develop client base

„

Expand market verticals

„

Target clients for long term

outsourcing and offshoring contracts

„

Continue to improve profits

„

Improve operating cash flow

„

Make smart acquisitions

„

Continue organic growth

„

Investment to support growth

„

Pay an enhanced dividend

9

55 strategic clients / 65% of total revenue

9

7 market verticals

9

Long term contracts share of revenue

increased from 8% to 11%

9

Adj. PBT up 96 %, again outpacing

revenue growth

9

Operating cash flow increased 8 times

9

Two earnings enhancing acquisitions in

the last 24 months

9

27% top line growth, outpacing market

five times

9

Nearly 250 new consultants added

9

Dividend of 0,20 € will be proposed

PBT growth strongly outpaces revenue growth.

Profit & Loss statement

„

Overhead costs

(G&A, S&M, R&D)

reduced by 1% of

revenue

leveraging from

group growth

Strengthened asset base

Balance Sheet

„

Net cash

position of €

6.9m,

enabling

further growth

„

Trade

receivables at

61 debtor

days (2006:

75) due to

improvements

in invoicing

and collection

„

Majority of

liabilities for

Cresta and

Triton

purchases will

be settled with

SQS shares

Improved operating cash flow enabling further growth.

Cash Flow statement

„

Investment

activities

include

€ 4.4m cash

payment for

Triton

acquisition

82% of SQS revenues are billable days by its own

consultants

SQS Business Model

Services

with own

consultants

(incl. Training)

(82%)

Revenue FY 2007:

€ 121.1 m

Services with

contractors (15%)

Tools (2%)

187 days

billable per

consultant

790 €/day

onshore

170 €/day

offshore

Average:

725 own

consultants

Onshore:

average

665

Offshore:

average

60

We propose to pay an enhanced dividend for 2007.

Dividend policy

„

SQS proposes to pay an enhanced

dividend (incl. 2006) of

20 €-cents per share for its 2007 financial

year

„

The 2007 dividend will be payable

following the AGM on May 28, 2008

„

SQS proposes to continue to operate a

dividend policy in line with earnings

Financial results summary

„

Revenue up 53% (in € m)

„

Adj. PBT up 96% (in € m)

„

Adj. EPS up 46% (in €-cent)

„

Operating cash flow strongly improved (in € m)

„

Triton acquisition was successful and immediately earning enhancing

„

Gross Margin improved ahead of top line growth due to higher pricing and good

consultants utilisation

„

Strong net cash position improvement of € 10.1m to € 6.9m enables us to fund further

growth and acquisitions

2.8

_1.6

11.4

05

06

07

54.7

05

06

07

78.9

121.1

07

05

06

3.7

5.3

10.5

05

06

07

22.0

41.0

28.0

All financial results for 2007 are exciting: PBT increase was

nearly twice the Revenue growth.

We have followed a strategy to develop the smaller verticals

of our client base.

Diversification of market verticals

Telco: 12%

Finance: 29%

Insurance: 6%

Legal&Media: 3%

Other: 7%

Fund Mgt.:1.5%

Electron./Technology: 1%

Auto/Aero/

Defence: 6%

Utilities: 0.5%

Verticals in 2005

1)

_{Verticals in 2007}

1)

Finance: 28%

Retail&

Insurance: 9%

Auto/Aero/

Defence: 7%

Legal&Media: 5%

Fund Mgt.: 3%

Other: 5%

Electron./

Technology: 6%

Utilities: 6%

The growth potential for SQS is a strong increase in testing

outsourced to external service providers.

„

79% acknowledge that software testing is essential in IT product development,

„

two thirds consider the independence of the test team from the software development team as

important,

„

79% agree that test automation strongly contributes to real value returns in IT investments and

„

34% responded that the budget for external test consultants will grow, 34% said it will stay the

same but only 3% replied it will go down.

Relevant SQS market

Sources: EITO 2006 for overall market; PAC: International Market Analysis „Software Testing“, 2008 for Testing/QM

50%

IT Services Europe

(CAGR: 5% p.a.) € 150b

SW App.

Developm./

Syst. Int.

SW App. Developm./

Syst. Int. € 75 bn

Testing/QM

10%

Testing/QM

€13bn

External

Service

Providers

External Service

Providers € 1.3bn

Systems

integrators

Test

Specialists

This share is expected to

double in the next 4 years

SQS has an approx.

10% market share

17.5%

€ 1,000m

Lloyds TSB – a long-term client with a huge potential to

increase SQS revenue.

Case study – Sarbanes Oxley

As a team we

have shown what

is possible and

produced a major

success for

Group IT at the

same time.

Bob Spencer,

Head of Group IT

Information Security

Objective

To meet December 2007 deadline for compliance with

Sarbanes-Oxley regulations

Challenge

Covered more than 50 different applications over five

platforms, with seven parallel streams of work being

undertaken across multiple locations

Benefits

Solution

„

Phase 1 - Definition of test approach

„

Phase 2 - Test execution to ensure 100% coverage

»

SQS strengthened its position as the largest player and

seeks to continue further market consolidation.

Competitive Landscape SQS markets and worldwide

Pure Play Test Specialists

Source: SQS, based on estimated 2007 sales figures

0

10

20

30

40

(€m)

60

80 100

120

42

Tescom

Logica CMG/

TEST

45

Applabs/IS

Integration

30

SQS

121

Microgen/

IMAGO

12

Quality

House

9

Capita/Mission

Testing

20

ps-test-ware

9

12

FHG/IESE

Tesnet

20

ALTRAN/MAP

16

Optium

21

MTP

11

RelQ/EDS

23

Q-LABS

20

SDLC

11

Test&Data

4

Vizuri

7

Validate

6

Insight

7

TCS

₆₆

Infosys

150

0

₅₀

(€m)

100

150

200

System Integrators

(testing part of total business)

SOGETI/SC

₁₁₀

Wipro

187

SQS

121

Thinksoft

10

RTTS

7

4

Verisoft

System Integrator/IT Services Group, not independent

Independent Testing/QM Provider

Cognizant

₁₁₃

Organic growth enhanced by selective acquisitions

Strategic summary

Organic

„

Further leverage SQS’s existing client base and grow the 55 strategic clients

„

Target existing clients for long term outsourcing and additional off-shoring

service contracts

„

Focus on the European market whilst expanding SQS offshore capacities

Acquisition

„

Successful track record of targeting and integrating acquisitions

„

Strengthen foothold in Europe and explore opportunities to expand into

Asia/Oceanic region

Positive Outlook

Outlook

„

Trading has been very good in the year to date

„

Strong pipeline

„

More than 51% of the revenue expected for 2008 has either already

been booked or contracted, a record for SQS

„

We will consolidate our most recent acquisition Triton in the field of

insurances management consulting

„

New strategic accounts with long term engagements

„

We look to the future with confidence

Extend

leadership in

independent

quality

management

and testing by

delivering

added value to

our customers

in order to

achieve their

goals

Grow the

business

significantly

above the

market growth

rate for IT

services

Remain the

financially

strongest

independent

quality service

company in

Europe

Extend and

retain a

strong base of

highly

motivated,

skilled and

best

performing

employees

Trendsetter

for quality

aspects in

business/IT:

Anticipate

major trends

and use this

for clients’

benefits

The SQS strategy is built on five strategic goals

Strategic Goals

1) Fußnote Quelle:

Studies prove the demand for independent software testing

Why independent software testing is necessary

An international study

1)

_showed:

„

65 per cent of survey respondents

agree that software testing should be

independent from development

„

68 per cent agreed that they will have

to adapt their testing to compliance

and regulatory requirements

„

79 per cent stated that automation

can deliver real value and return on

investment to the process of software

testing

„

34 per cent of the companies want to

rise their budget for external testing

16

27

26

28

34

₂₉

35

53

33

46

49

51

53

46

31

40

28

23

15

18

19

1994

1996

1998

2000

2002

2004

2006

IT projects

(in per cent)

Failed

Challenged

Global study on success rate of IT

projects

2)

Our methodology can be applied to all models: the V-Model

(Verification & Validation) is one of them.

Proven processes

Requirements

Specification

Functional

System Design

Technical

System Design

Component

Specification

Coding

Component

Test

Integration

Test

System

Test

Acceptance

Test

Validation

time / order

Verification

9% EBIT margin in sight – targets under review

EPS up 46%

Proprietary methodologies, our services and experience from

over 4,000 projects keep us ahead of the competition.

What keeps SQS ahead from its competitors

435

300 bluechip

Proprietary Methodologies

Developed over the course of

approx. 4,000 projects

Employees

More than 1012

employees*

Services

End-to-end portfolio including

emerging skill sets

Clients

Offhore secures onshore business.

Case study – Offshore testing, South Africa

1) Fußnote

Client Background

„

Existing onshore client (UK)

„

Technology/IS company

„

Leading provider of messaging security and management

services to business

„

South Africa staff involved in onshore projects in 2005

Project Background

„

Secure “Enterprise Instant Messenger” messaging service/application

„

Involving US & Canada

„

Upgraded technology platform

„

2006 delivery (February to June 2006)

„

Successful EIM launch 12th June 2006

Some key benefits

„

Significant cost reduction by use of offshore resources and facilities

Approximately 50% reduction in cost using offshore test team

„

Significant test coverage gains achieved through pioneering automation

by technically-savvy offshore resources.

Our customers are of high value for the business.

Customer Quotes

Mike Stacey, CTO Vodafone Ireland

The release was not only the largest deployment but was also delivered

to an exceptional level. Several days after the deployment there are no

significant operational issues in the performance of the system

deployed.

Tim Allen, Change and Execution Director

Egg Bank

They were innovative and offered a service-based delivery—structured

around Test Points and using the Cresta TestStrategist software

application to provide visibility and predictability.

SQS have made a major contribution to helping us raise the bar on the

»

»

»

«

«

Development of number of shares

The Cresta and Triton considerations payable in shares have been

and are expected to be earnings enhancing.

Unaudited add. information, in

case full earn out targets are

met

04/2007:

18.69m

09/2007:

21.55m

09/2008:

22.88m**

10/2008:

23.74m

0.39 €e*

2.05 €

1.784m €

0.87m

Total:

3.568m €

1.784m €

consolidation

Total:

1.73m

0.86m

Add nb of shares issued for Triton

acquisition

0.37 €e*

0.37 €e*

0.35 €

1.05 €

2.07 €

0.67 €

0.60 €

EPS on new shares

Total:

2.568m €

0.856m €

1.712m €

Total:

4.14m

1.28m

2.86m

acquisition

*analyst estimate average

** incl. 0.053m shares increase from convertible

bonds in 02/2008

FC Triton earn-out

10/2009:

24.61m

SQS Software Quality Systems AG