QPR Software
Interim report (Q1 and Q3)

THIRD QUARTER NET SALES EUR 2.0 MILLION, OPERATING PROFIT INCREASED 4%, LOWER ESTIMATE FOR FULL YEAR NET SALES

QPR SOFTWARE PLC     STOCK EXCHANGE RELEASE OCTOBER 29, 2013 AT 9.30 AM

INTERIM REPORT JANUARY-SEPTEMBER 2013

THIRD QUARTER NET SALES EUR 2.0 MILLION, OPERATING PROFIT INCREASED 4%, LOWER ESTIMATE FOR FULL YEAR NET SALES 

Summary third quarter 2013

• Net sales EUR 1,961 thousand (2012: 2,011).
• Net sales decreased 2% due to a significant decrease in software license net sales. Net sales from software rentals increased 37%.
• Recurring revenues (software rentals and maintenance services) increased 2% and were 60% of total net sales (58). The growth in recurring revenues was slowed down by exchange rate changes in maintenance service revenues.
• Net sales from consulting services increased 2% and were 32% of total net sales (30).
• Operating profit EUR 171 thousand (165), growth 4%.
• Profit before taxes EUR 167 thousand (169).
• Profit for the quarter EUR 142 thousand (152).
• Earnings per share EUR 0.012 (0.012).
• Estimate for full year net sales has been lowered. Estimate for operating profit is unchanged.

 Summary January-September 2013

• Net sales EUR 6,377 thousand (2012: 6,628).
• Net sales decreased 4% due to a significant decrease in software license net sales. Net sales from software rentals increased 42%.
• Recurring revenues (software rentals and maintenance services) increased 6% and were 55% of total net sales (50). The growth in recurring revenues was slowed down by exchange rate changes in maintenance service revenues.
• Net sales from consulting services increased 5% and were 34% of total net sales (31).
• Operating profit EUR 361 thousand (594).
• Cash flow from operating activities EUR 1,249 thousand (1,862).
• Profit before taxes EUR 347 thousand (562).
• Profit for the period EUR 295 thousand (425).
• Earnings per share EUR 0.024 (0.035).

 Revised outlook 2013

The Company estimates its net sales in 2013 to be slightly lower (3 - 7%) than the level in previous year (2012: EUR 9.3 million). Earlier, net sales were estimated to remain on the same level or to grow slightly compared to previous year. Especially net sales from software rentals and enterprise architecture consulting are expected to grow, but software license net sales to decrease.

Outlook for operating profit remains unchanged, but the Company details its estimate. In the January-June 2013 interim report, full year operating profit was estimated to remain lower than in previous year (2012: EUR 0.9 million), but to improve significantly from the level in January-June 2013 (EUR 0.2 million). To detail this with additional information, the Company estimates the full year operating profit margin to be 5 - 8% of net sales.

KEY FIGURES

REPORTING

This report complies with requirements of IAS 34 ”Interim Financial Reporting”. Starting from the beginning of 2013, the Company has applied certain new or revised IFRS standards and IFRIC interpretations as described in the Consolidated Financial Statements 2012. The implementation of these new and revised requirements have not materially impacted the reported figures. For all other parts, the accounting and valuation principles are the same as they were in the 2012 financial statements. This report is unaudited.

QPR Software’s business operations consist of software and consulting services sales. The Company reports income for products and services as follows: software license sales, software maintenance services, software rentals, and consulting services.

QPR reports the following business segments: Direct and OEM business (software license and rental sales, maintenance and consulting services sales to direct customers and OEM customers) and Resellers (software license and rental sales, maintenance and consulting services sales through resellers and the Russian subsidiary). 

REVIEW BY THE CEO

”After fast and profitable growth in 2012, the development of QPR Software’s business operations has been twofold during the current year. Our new businesses have continued their fast growth, but we have declining net sales in our traditional reseller business that is offering software for performance management. The decline is especially due to lower software license sales than in the previous year. Higher net sales from software rentals have not fully compensated for the decline in license net sales.

Our new businesses are software and consulting businesses based on enterprise architecture, and the process analysis business. The combined organic growth for these businesses has been over 20% during this year, and they have grown to represent approximately half of QPR’s net sales. The unsatisfactory development in our traditional business and in the demand for technical consulting has, however, led to a slight 4% decline in QPR’s total net sales in January-September.

The development of our expenses has been moderate in January-September, despite outlays in our growth businesses, which is why our profitability estimate for 2013 remains unchanged in spite of lower estimate for net sales. To detail our estimate with additional information, we expect the full year operating profit margin to be 5 - 8% of net sales.

Based on the rapid growth of our new businesses, we estimate that net sales will return to a growth path already next year. Our target is to reach a 15% annual organic and profitable growth in 2014 – 2016, on the average. The Company’s strategy has been updated during this fall, according to which we will concentrate on four strategic targets in 2014 – 2016: 

• We will expand the international reseller channel for our new software products (QPR EnterpriseArchitect ja QPR ProcessAnalyzer). The customer benefits from these software and related services correspond well to the essential needs of the European organizations, which is our main market. In the current tight economic situation, these needs include especially the capability to streamline business operations, the flexibility to change structures and to manage operations in accordance with developing strategies.
   
• In Finland, we will continue to grow our enterprise architecture business, especially by focusing on consulting our customer organizations in their operational development. Our expanding customer base in consulting also creates a solid foundation for increasing the sales of our QPR EnterpriseArchitect software. 

• In our software offering, we will concentrate on the operational development needs of our customers. We will further integrate our software offering and increase its scalability. We will deepen and widen our service offering especially in enterprise architecture and process analysis consulting. We aim to differentiate ourselves from our competitors especially through our know-how in metrics, process analysis and SAP. 

• In the traditional performance management business, we will focus our efforts on developing replicable solutions based on the strengths of our software products. These solutions are offered to our reseller partners to boost the sales of our software.” 

Jari Jaakkola
CEO

NET SALES

Net sales in the third quarter were EUR 1,961 thousand (2,011) and decreased 2% from the corresponding period of the previous year. Net sales decreased due to a clear decline in software license sales and maintenance services, which was not fully compensated by the continued strong growth in software rental net sales. Approximately one third of the 11% decline in net sales from software maintenance services was due to strengthening of the euro against main export currencies (U.S. dollar, South African rand, and Japanese yen).

Net sales in January-September were EUR 6,377 thousand (6,628) and decreased 4% from the corresponding period of the previous year.

Net sales by product group

New software sales by QPR are increasingly made through software rentals rather than perpetual license sales, which is reflected as decline in software license net sales and increase in software rental net sales. In Finland, clear majority of new sales are made on a rental basis. Internationally, however, the transition is still ongoing.

In the third quarter, software license net sales decreased 34%. Net sales from software maintenance services declined 11%, partly due to exchange rate changes. Net sales from consulting services increased 2%. Net sales from enterprise architecture consulting grew strongly, whereas net sales from technical consulting decreased.

Total recurring revenue (net sales from software maintenance services and software rentals) grew 2% in the third quarter. The growth in recurring revenues was slowed down by exchange rate changes in maintenance service revenues. The share of recurring revenue of total net sales was 60% (58) in the third quarter.

Net sales by product group in January-September developed similarly as in the third quarter.

Net sales by business segment

In the third quarter, net sales in the Direct and OEM business grew 3% from the corresponding period last year. The growth was especially strong in net sales from software and services aiming at developing enterprise architecture. Net sales from technical consulting decreased.

Net sales in the Resellers business decreased 11% in the third quarter, primarily due to decline in software license net sales and exchange rate changes in maintenance service revenues.

Net sales in January-September developed similarly as in the third quarter. 

FINANCIAL PERFORMANCE

Operating profit by business segment:   

The Group’s operating profit in the third quarter increased slightly from the previous year, although net sales were slightly lower than in the previous year.

Operating profit in the Direct and OEM business declined in the third quarter compared to the previous year, due to continued outlays in the growth businesses. Operating profit in the Resellers business increased, as credit losses of EUR 15 thousand (53) included in the results were lower than in the previous year.

The Group’s expenses in the third quarter declined 4%, mainly due to lower credit losses. Personnel expenses in the third quarter were on the previous year’s level and were 68% of total expenses (65).

Net financial expenses in the third quarter were EUR 3 thousand (net financial income EUR 4 thousand). Net financial expenses included foreign exchange losses of EUR 1 thousand (gains of EUR 7 thousand). Profit before taxes in the third quarter was EUR 167 thousand (169). Income taxes in the third quarter were EUR 25 thousand (17). Profit for the quarter was EUR 142 thousand (152). Earnings per share for the third quarter were EUR 0.012 (0.012).

In January-September, operating profit in the Direct and OEM business declined due to increased outlays in the growth businesses. Operating profit in the Resellers business declined due to lower net sales. Operating profit for the Resellers business in January-September includes credit losses of EUR 36 thousand (202). The Group’s profit before taxes in January-September was EUR 347 thousand (562). Income taxes were EUR 52 thousand (137). The Group’s effective tax rate is lower than in the previous year, since the Company expects to be able to utilize an additional tax deduction on research and development activities, valid for years 2013 – 2014 in Finland. Earnings per share were EUR 0.024 (0.035).

FINANCE AND INVESTMENTS

Cash flow from operating activities was EUR 1,251 thousand (1,862) in January-September and EUR 53 thousand (230) in the third quarter. Cash and cash equivalents at the end of the third quarter were EUR 1,248 thousand (1,797).

Investments in January-September totaled EUR 609 thousand (398). Slightly more than half of the investments were made in product development.

Interest-bearing liabilities decreased and were EUR 113 thousand (340) at the end of the reporting period. The gearing ratio was -42% (-51). Current liabilities include deferred revenue in total of EUR 1,428 thousand (1,536). Return on investment was 16% (24) in January-September and 24% (21) in the third quarter.

At the end of the reporting period, equity ratio was 53% (54) and the consolidated shareholders’ equity was EUR 2,700 thousand (2,854). Return on equity was 14% (20) in January-September and 21% (22) in the third quarter.

The Annual General Meeting on March 14, 2013 authorized the Board of Directors to decide on issuing a maximum of 4,000,000 new shares, to decide on conveyance of a maximum of 550,000 own shares held by the Company, and to decide on acquiring a maximum of 250,000 own shares. The authorizations are in force until the next Annual General Meeting. On March 20, 2013, the Company issued a stock exchange release on a decision to start acquiring own shares through public trading in NASDAQ OMX Helsinki Ltd. 

PRODUCT AND SERVICE DEVELOPMENT

Product development expenses in January-September were EUR 1,261 thousand (1,217), representing 20% (18) of net sales. Product development expenses do not include amortization of capitalized product development expenses.

In January-September, product development expenses were capitalized for a total amount of EUR 343 thousand (296). The amortization period for capitalized product development expenses is four years. The amortization of capitalized product development expenses in January-September was EUR 211 thousand (207).

Product development employed 26 persons at the end of the quarter, which corresponds to 32% of the total personnel.

In January-September, software product development activities were especially focused on the QPR EnterpriseArchitect and QPR ProcessAnalyzer products.

By developing its consulting service products, the Company aims to grow its local business in Finland, and to accelerate its international software sales by offering complementary service concepts and solutions to its reseller partners.

PERSONNEL

At the end of the quarter, the Group employed a total of 80 persons (80). Average number of personnel in January-September was 83 (78) and personnel expenses totaled EUR 4,221 thousand (3,865).

For incentive purposes, the Company has a bonus program that covers all employees. Short-term remuneration of the top management consists of salary, fringe benefits and a possible annual bonus based on net sales and operating profit performance. The maximum annual bonus of executive management team, including the CEO, is 40% of the annual base salary. Long-term remuneration of the executive management team consists of a share-based incentive plan. Information on incentive plans in the Annual Report 2012: www.qpr.com --> “Investors” section. 

SHARES AND SHAREHOLDERS

The Annual General Meeting held on March 14, 2013 approved the Board's proposal that a per-share dividend of EUR 0.04 (0.03), a total of EUR 486 thousand (367), is paid for the financial year 2012. The dividend was paid to shareholders entered in the Company's shareholder register, maintained by Euroclear Finland Oy, on the record date of March 19, 2013. The dividend payment date was April 3, 2013.

OTHER EVENTS IN JANUARY-SEPTEMBER

In March, QPR Software and the German software company JobRouter AG announced a new process analysis service based on QPR ProcessAnalyzer software. The companies have agreed on cooperation, where JobRouter will use QPR ProcessAnalyzer software in fact-based visualizing and analysis of their customers’ processes in the JobRouter workflow solution.

In April, QPR Software published an agreement with CGI, the leading IT and business process services company, for a new process analysis service based on QPR ProcessAnalyzer software product. With the service, CGI will be able to show their customers the real state of their processes and help support them in reaching operational efficiency. For QPR, the partnership gives the opportunity to bring QPR ProcessAnalyzer to a larger clientele.

In April, after a tender competition, Hansel Oy, the central procurement unit of the Finnish Government, elected QPR Software as one of the frame agreement providers of management consulting services for years 2013–2017. The frame agreement enables QPR to offer its professional services in simplified tender competitions by government entities in their operational development and enterprise architecture projects. 

SUBSEQUENT EVENTS

On October 1, 2013, QPR Software released version 4.5 of its QPR ProcessAnalyzer software. The latest version enables continuous process analytics by providing automated ETL (Extract, Transform, Load) functionalities. This supports the transition from one-off analyses to real-time monitoring of process performance that can be used, for example, to optimize order-to-delivery process. Through continuous automated process analysis, companies have good visibility over their process efficiency and operations.

On October 8, 2013, QPR Software announced the signing with the Finnish Tax Administration of a frame agreement on management consulting services until the end of 2017. 

GOVERNANCE

The Annual General Meeting on March 14, 2013 resolved that the Board of Directors consists of four (4) ordinary members. The AGM elected the following members to the Board of Directors: Kirsi Eräkangas, Jyrki Kontio, Vesa-Pekka Leskinen and Topi Piela. In its first meeting following the Annual General Meeting, the Board of Directors elected Vesa-Pekka Leskinen as Chairman of the Board.

The AGM elected KPMG Oy Ab, Authorized Public Accountants, as QPR Software Plc's auditors, with Kirsi Jantunen, Authorized Public Accountant, acting as principal auditor.

The AGM authorized the Board to decide on issuing new shares and repurchasing the Company’s own shares. 

The conditions of all authorizations of the Board and other decisions made by the Annual General Meeting are available in their entirety on the stock exchange release published by the Company on March 14, 2013 and available on the investors section of the Company's web site, www.qpr.com.

SHORT-TERM RISKS AND UNCERTAINTIES

Internal control and risk management in QPR Software aims to ensure that the Company operates efficiently and effectively, distributes reliable information, complies with regulations and operational principles, reaches its strategic goals, reacts to changes in the market and operational environment, and ensures the continuity of its business.

QPR has identified the following four groups of risks related to its operations: risks related to business operations (country, customer, service delivery, personnel, legal and financial risks as well as risks related to the Company’s resellers), risks related to information and products (QPR products, IPR, data security), risks related to financing (foreign currency, bad debt), and risks related to new businesses (growth of new business, product development investments in new business). The Company has an insurance policy for property, operational and liability risks. The Company monitors country, customer, personnel and finance risks also in the Russian subsidiary OOO QPR Software.

Financial risks include reasonable credit risk concerning individual business partners, which is characteristic to any international business. QPR seeks to limit this credit risk by continuous monitoring of standard payment terms, receivables and credit limits. The escalated economic crisis in the euro area has, according to management’s estimate, to some extent increased the credit risk that has earlier remained on a moderate level, and has resulted in increased credit losses. During the current year, however, the amount of credit losses and overdue receivables has been clearly lower than in the previous year. In January-September, EUR 36 thousand (202) of credit losses were recorded. The amount of trade receivables over 60 days past due was 9% (11) of total trade receivables at the end of the quarter.

Approximately 65% of Group’s trade receivables were in euro at the end of the quarter. At the end of the quarter, the Company had not hedged its foreign currency (non-euro) trade receivables.

No significant changes have taken place in the Company’s short-term risks and uncertainties during January-September. Risks and risk management related to the Company’s business are further described in the Annual Report 2012, pages 14-15 (www.qpr.com/investors/key-figures-and-reports.htm).

QPR SOFTWARE PLC

BOARD OF DIRECTORS

Further information:

Jari Jaakkola, CEO
Tel. +358 (0) 40 5026 397

DISTRIBUTION:

NASDAQ OMX Helsinki Ltd
Main Media

Neither this press release nor any copy of it may be taken, transmitted or distributed, directly or indirectly, in or into the United States of America or its territories or possessions.     

NOTES TO INTERIM FINANCIAL STATEMENTS

ACCOUNTING PRICIPLES

This report complies with requirements of IAS 34 ”Interim Financial Reporting”. Starting from the beginning of 2013, the Company has applied certain new or revised IFRS standards and IFRIC interpretations as described in the Consolidated Financial Statements 2012. The implementation of these new and revised requirements have not materially impacted the reported figures. For all other parts, the accounting and valuation principles are the same as they were in the 2012 financial statements.

When preparing the consolidated financial statements, management is required to make estimates and assumptions regarding the future and to consider the appropriate application of accounting principles, which means that actual results may differ from those estimated.

All amounts presented in this report are consolidated figures, unless otherwise noted. The amounts presented in the report are rounded, so the sum of individual figures may differ from the sum reported. This report is unaudited.

During the reporting period, the Group did not have any financial instruments measured at fair value.

Names of the segments have been changed in 2013. Earlier, these segments were called Finland operations and International operations.