QPR Software
Half Year financial report

QPR SOFTWARE'S HALF YEAR FINANCIAL REPORT JANUARY – JUNE 2017

SUMMARY

Software net sales increased in the first half of the year

April - June 2017

• Net sales EUR 2,062 thousand (2016: 2,173). Software license net sales increased (+17%), but total net sales decreased by 5% due to the decline in consulting net sales (-15%).
• Operating profit EUR 4 thousand (230).
• Operating margin 0.2% (10.6).
• Cash flow from operating activities EUR -66 thousand (192).
• Profit before taxes EUR -9 thousand (217).
• Profit for the quarter EUR 18 thousand (175).
• Earnings per share EUR 0.001 (0.015).

 January – June 2017

• Net sales EUR 4,369 thousand (2016: 4,215). Net sales increased 4% due to the strong growth of software license net sales (+81%). Growth was slowed down by decline in consulting net sales (-10%).
• Operating profit EUR 280 thousand (125).
• Operating margin 6.4% (3).
• Cash flow from operating activities EUR 1,649 thousand (1,422).
• Profit before tax EUR 256 thousand (95).
• Profit for the period EUR 171 thousand (70).
• Earnings per share EUR 0.014 (0.006).
• Outlook for 2017 remains unchanged.

Business operations

QPR Software´s mission is to make customers agile and efficient in their operations. We innovate, develop, and sell software aimed at analyzing, monitoring, and modeling operations in organizations. Furthermore, we offer customers a variety of consulting services.

OUTLOOK

Operating environment and market outlook

We estimate the growth of process mining software and related services to accelerate compared to previous year. This software product category is still relatively new, but competition and investments are increasing strongly in this market.

In developed markets, competition is expected to increase for process and enterprise architecture modeling software and performance management software. Whereas in emerging markets, growth potential for these software products is still expected.
 

Outlook for 2017

Outlook for 2017 remains unchanged.

QPR will continue to invest in sales activities for its in-house developed process mining software and the related services. QPR estimates that this business will grow significantly this year.

Tightened competition in the software business for process and enterprise architecture modeling and performance management is expected to have a negative impact on sales in parts of QPR’s reseller channel, especially in developed markets. To offset this negative impact, QPR seeks growth in emerging markets by renewing its reseller partner channel related to these products.

In its home market in Finland, QPR will especially focus to develop and deliver process modeling and performance management products. In operational development consulting we will invest in developing and expanding our key accounts.

QPR estimates that its net sales will grow in 2017, but operating profit will remain slightly lower than previous year due to growth investments. The planned increase in costs is mainly related to accelerating software development and growth investments in international business.

Net sales in individual quarters are expected to fluctuate to some extent, due to timing of software license deals in each quarter.

REPORTING

QPR Software innovates, develops, sells and delivers software and services in international markets aimed at operational development in organizations. QPR Software reports one operating segment: Operational development of organizations. In addition to this, the Company reports revenue from products and services as follows: Software license sales, Software maintenance, Software rentals, and Consulting. Software rentals and Software maintenance together form the recurring revenue reported by the Company. Recurring revenue is based on long-term contracts continuing for the time being or for a fixed period of several years. Typically rental and maintenance charges are invoiced annually in advance.

Geographical areas reported are Finland, the rest of Europe (including Russia and Turkey), and the rest of the world. Net sales are reported according to the customer´s head quarter location.

REVIEW BY THE CEO

In line with our strategy, we seek to grow especially our international software sales in the coming years. To reach this target, we started to increase our product development, marketing and delivery resources in late 2016. In software development, we have placed renewed focus on great user experience. Our focus areas are process mining, process analytics, and operational performance monitoring. We believe that the relevant market for these focus areas will grow significantly, as companies collect more and more transaction and other event data from their operations.

In January-June, our international net sales grew by 13% compared to last year, and our software net sales grew by 12 %. In the first quarter growth was stronger than in the second, which was due to higher software license net sales. We did not close large software license deals in the second quarter, which led to lower average deal size than in the first quarter. Net sales in individual quarters are expected to be influenced also in the future by the timing of software license deals.

Consulting net sales decreased in January-June, which was due to a decline in operational development consulting to Finnish customers. However, in the second quarter we managed to strengthen operational development consulting order backlog for the latter half of the year.

Jari Jaakkola

CEO

NET SALES DEVELOPMENT

April – June 2017

Second quarter net sales were EUR 2,062 thousand (2,173) and decreased by 5% compared to the corresponding period last year. This was due mainly to a decrease in consulting net sales.

Software license net sales grew by 17% in April-June. Although license net sales grew compared to equivalent period last year, it remained lower than in the first quarter this year. This was due to lower average deal size – in the second quarter we did not close large software license deals.

Software maintenance net sales remained at the prior year level, and churn remained low. Software rental net sales decreased by 6% as new software sales focused mainly on license sales. The recurring revenue (software maintenance and software rentals) share of total net sales was 51% (50).

Consulting net sales decreased by 15%, which was due to lower operational development consulting sales to Finnish customers. In addition, we increased significantly the use of consulting resources to support software sales. This reduced consulting invoicing.

Consolidated net sales in international markets increased by 6%, but decreased by 10% in Finland. Of the Group net sales, 68% (71) derived from Finland, 18% (18) from the rest of Europe (including Russia and Turkey) and 14% (11) from the rest of the world.

January – June 2017

Net sales in the January – June reporting period were EUR 4,369 thousand (4,215) and grew by 4%.

Software license net sales grew strongly (81%) compared to previous year. Especially increase in direct process mining and modeling software sales contributed to this positive development. Furthermore, international channel sales in performance management software increased. Software maintenance and software rental net sales decreased by 1% and 6%, respectively. The share of recurring revenue was 49% (52) of total net sales.

Total software net sales (software license, maintenance and rental) grew by 12%.

Consulting net sales decreased by 10%, which was due to lower operational development consulting sales to Finnish customers.

Consolidated net sales in international markets increased 13% and remained on the last year´s level in Finland. Of the Group net sales, 68% (70) derived from Finland, 20% (19) from the rest of Europe (including Russia and Turkey) and 12% (11) from the rest of the world.

FINANCIAL PERFORMANCE

April – June 2017

The April – June Group operating profit was EUR 4 thousand (230), or 0.2% of net sales (10.6). Operating profit decreased mainly due to lower net sales and higher personnel costs.

The Group´s April-June fixed costs were EUR 2,007 thousand (1,844), and increased by 9% compared to the prior year corresponding period. Personnel expenses represented 73.4% (73.8) of the fixed costs and amounted to EUR 1,473 thousand (1,361).

The Group´s April-June profit before tax was EUR -9 thousand (217) and profit for the period was EUR 18 thousand (175). Taxes recorded for the period were EUR 27 thousand positive (42 negative). Net positive taxes resulted from the decreased profit as well as from withholding taxes and tax accruals related to prior year. Earnings per share (fully diluted) were EUR 0.001 (0.015).

January – June 2017

In the January – June reporting period, the Group operating profit was EUR 280 thousand (125), or 6.4% (3.0) of net sales. Operating profit increased from the previous year due to higher net sales.

The Group´s January – June fixed costs were EUR 3,963 (3,856), and increased by 3.0% compared to prior year. Personnel costs represented 72.5% (75.7) of fixed costs and were EUR 2,872 thousand (2,918). Credit losses, inclusive in fixed costs, totaled EUR 9 thousand (8).

Profit before taxes in the January – June reporting period was EUR 256 thousand (95) and profit for the period was EUR 171 thousand (70). Tax costs recorded for the period were EUR 85 thousand (24). Earnings per share (fully diluted) were EUR 0.014 (0.006).

FINANCE AND INVESTMENTS

January – June cash flow from operating activities was EUR 1,649 thousand (1,422). The strong cash flow resulted from the increased profit as well as from decreased working capital. Cash and cash equivalents at the end of the reporting period were EUR 1,336 thousand (900).

January – June investments totaled EUR 516 thousand (366), and were mainly product development expenditure.

Net financial items in the reporting period January - June were EUR 24 thousand (30). Net financial expenses included net foreign exchange losses of EUR 29 thousand (22).

At the end of the reporting period, the Company had no interest-bearing liabilities. The gearing ratio was -44% (-33). Current liabilities included deferred revenue in total of EUR 2,008 thousand (2,427). Annualized return on investment in the reporting period January – June was 19% (9) and in April – June -4% (30).

At the end of the reporting period, the equity ratio was 69% (65) and the consolidated shareholders’ equity was EUR 3,055 thousand (2,745). Annualized return on equity in the reporting period January – June was 11% (5) and in April – June 2% (25).

PRODUCT DEVELOPMENT

QPR innovates and develops software products that analyze, measure and model operations in organizations. Furthermore, we offer customers a variety of related solutions.

At the end of 2016, we started to accelerate our product development by adding resources in a controlled manner. Subsequently, we expect product development expenses to grow this year. Product development expenses do not include amortization of capitalized product development expenses. The capitalized product development expenses are amortized in four years.

Second quarter product development expenses added up to EUR 657 thousand (418), equal to 32% (19) of net sales. During April – June product development expenses were capitalized for EUR 218 thousand (161). April – June amortization of capitalized product development expenses was EUR 167 thousand (147).

In the January – June reporting period, product development expenses were EUR 1,222 thousand (906), equal to 28% of net sales (22). During January – June product development expenses were capitalized for EUR 449 thousand (340). The January – June amortization of capitalized product development expenses was EUR 318 thousand (256).

The Company develops the following software products: QPR EnterpriseArchitect, QPR Metrics, QPR ProcessDesigner, and QPR ProcessAnalyzer. In addition, QPR develops services and solutions that are complementary to its software.

PERSONNEL

At the end of the reporting period, the Group employed a total of 80 persons (69). We have increased personnel resources especially in product development. The average number of personnel during the second quarter was 78 (70) and during the January-June reporting period 75 (75)

At the end of the reporting period the average age of employees was 38.9 (39.1) years. Women accounted for 27 % (30) of the employees, and men for 73% (70). Sales and marketing employs 15% (20) of the personnel, consulting and customer service 41% (39), product development 34% (29) and administration 10% (12).

For incentive purposes, the Company has a bonus program that covers all employees. Remuneration of the top management consists of salary, fringe benefits, and a possible annual bonus based mainly on net sales performance.

The Annual General Meeting held on March 28, 2017 approved the Board's proposal to pay a per-share dividend of EUR 0.03 (0.02), a total of EUR 360 thousand (240) for the financial year 2016. Dividends were paid to all shareholders registered in the Company's shareholder register, maintained by Euroclear Finland Oy, on the record date of March 30, 2017. Dividends were paid on April 7, 2017.

OTHER EVENTS DURING THE REPORTING PERIOD

In the beginning of 2017 the Company´s international channel sales, customer care and marketing were merged into process mining business. Matti Erkheikki was appointed to lead the new Process Mining and Strategy Management business unit.

Tero Aspinen, responsible for Middle East business and offering development in Strategy Management, joined the Executive Management Team as of 1^st January 2017. 

EVENTS AFTER THE REPORTING PERIOD

There were no significant events after the reporting period.

GOVERNANCE

The Annual General Meeting on March 28, 2017 resolved that the number of Board Members is five (5).

The Annual General Meeting re-elected Kirsi Eräkangas, Vesa-Pekka Leskinen and Topi Piela as members of the Company´s Board of Directors. In addition, the Annual General Meeting elected Juha Häkämies and Taina Sipilä as new members of the Board of Directors.

Juha Häkämies is Vice President, Strategy, and a member of the management team of Gasum. Prior to this, he has worked as Head of M&A and Business Development at Basware and, among other things, in managerial and business development positions at Digia and Sonera. Taina Sipilä is the CEO and Founder of the software company Dear Lucy. She is also a member of the board in the software company Sympa. Prior to this, she worked as the chairman of the board in Sympa and earlier as the CEO.

The term of office of the members of the Board of Directors expires at the end of the next Annual General Meeting. At its organizing meeting, the Board of Directors elected Vesa-Pekka Leskinen as its Chairman.

The Annual General Meeting re-elected Authorized Public Accountants KPMG Oy Ab as QPR Software´s auditor with Kirsi Jantunen, Authorized Public Accountant, acting as principal auditor. The term of office of the auditor expires at the end of the next Annual General Meeting.

The Annual General Meeting decided to authorize the Board of Directors to decide on an issue of new shares and conveyance of the own shares held by the Company (share issue) either in one or in several occasions. The share issue can be carried out as a share issue against payment or without consideration on terms to be determined by the Board of Directors.

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 28, 2017 and available on the investors section of the Company's web site, http://www.qpr.com/investors/stock-exchange-releases.htm.

SHORT-TERM RISKS AND UNCERTAINTIES

Internal control and risk management at 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 three groups of risks related to its operations: risks related to business operations (country, customer, personnel, legal), risks related to information and products (QPR products, IPR, data security) and risks related to financing (foreign currency, short-term cash flow). The Company has an insurance policy for property, operational and liability risks.

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 amount of trade receivables over 60 days past due was 10% (14) of total trade receivables at the end of the reporting period.

At the end of the reporting period, approximately 67% (69) of Group’s trade receivables were in euro. At the end of the reporting period, the Company had not hedged its non-euro trade receivables.

QPR has earlier reported that it initiated an arbitration process in summer 2016, due to a customer's decision to dissolve a contract, which decision QPR regarded unjustified. This arbitration process was completed in May 2017. The arbitration court resolved to sentence the defendant to compensate the entire value of the violated contract to QPR. The arbitration court dismissed the customer's counterclaim.

During the first quarter, the Company identified an increased credit risk with regards to receivables from one customer. About EUR 100 thousand revenue has been recognized from these receivables. A payment plan has been made together with the customer, and its implementation continues to be closely monitored.

Risks and risk management related to the Company’s business are further described in the Annual Report 2016, pages 13-15 (https://www.qpr.com/investors/financial-information/annual-reports)

FINANCIAL INFORMATION

In 2017, QPR Software will publish interim reports in English and Finnish on the following dates:

• Interim Report Q3/2017: Thursday, October 26, 2017

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 PRINCIPLES

This report complies with requirements of IAS 34 ”Interim Financial Reporting”. Starting from the beginning of 2017, the Group has applied certain new or revised IFRS standards and IFRIC interpretations as described in the Consolidated Financial Statements 2016. The implementation of these new and revised requirements have not impacted the reported figures. For all other parts, the accounting principles and methods are the same as they were in the 2016 financial statements.

The Group has made a preliminary assessment of the impacts of IFRS 15 during the year 2016. The Group continues to review the revenue streams and customer contracts during 2017 to clarify the impact of the needed changes. Further analysis have identified the following major changes:

• The Group interprets that the IFRS 15 principal versus agent consideration requires, that the Group in the future includes the resales commission in the reported revenue derived from resellers, and includes the resales commission, respectively, in reported costs. Currently the resales revenue and costs have been reported without the resales commission. This change increases net sales revenue and lowers relative profitability, but does not affect absolute profitability.
• License part deriving from long-term software rental agreements, which are included in the recurring revenue, will in the future be recognized at one point instead of the current recognition over time. This will lead to an earlier recognition of revenue within the year.
• Numerical estimates of the effects will be given during the year 2017, as soon as the reliability of the estimates has been assured.

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.