QPR Software Interim Financial Report January - March 2019

QPR SOFTWARE STOCK EXCHANGE RELEASE, APRIL 25, 2019 AT 9.00 AM

January-March 2019

• Net sales amounted to EUR 2,748 thousand (2018: 2,882).
• Process mining software QPR ProcessAnalyzer's net sales increased over 50%, in line with our strategic targets.
• International channel net sales decreased compared to January – March 2018, when we closed several large performance management software deals in reseller channel.
• Recurring revenue 53 % of net sales (57).
• Operating result EUR 187 thousand (400). The decrease in operating result was due to outlays in our growth business areas.
• Operating result 7% of net sales (14).
• Result for the quarter EUR 141 thousand (124).
• Earnings per share EUR 0.012 (0.010).
• Outlook for the year 2019 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

In recent years, QPR Software has invested heavily in developing the company's new process mining software, as well as renewing all user interfaces of its software products. We estimate that the demand for process mining software and related services will continue to grow rapidly over the course of 2019.

In developed markets, we expect the competition for process and enterprise architecture modeling, and performance management software to remain tight. The Company still sees growth potential for these products in emerging markets.

Outlook for 2019

QPR expects net sales to grow in 2019 (2018: EUR 10,047 thousand). The most significant sources of growth are the international process mining software sales of QPR ProcessAnalyzer, and the consulting services supporting QPR's software business in Finland. Growth in quarterly reports is estimated to have significant variance, and it is impacted especially by the closing times of large software deals.

In 2019, QPR will increase investments in its growing business segments. Due to these investments, the Company estimates that its operating result will be lower than in the previous year, while still remaining positive (2018: 5.2% of net sales).

KEY FIGURES              

REPORTING

QPR Software innovates, develops, sells and delivers software and services in international markets aimed at facilitating 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 licenses, Renewable software licenses, Software maintenance services, Cloud services and Consulting.

Recurring revenue reported by the Company consists of Software maintenance services and Cloud services. In addition, recurring revenue includes Renewable software licenses .

Software licenses are sold to customers for perpetual use or for an agreed, limited period. Renewable software licenses are sold to customers as a user right with an indefinite duration. These contracts are automatically renewed at the end of the agreed period, usually one year, unless the agreement is terminated within notice period. Renewable license revenue is recognized at one point in time, in the beginning of the invoicing period.

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 headquarter location.

The figures in this interim report have been reported in accordance with the IFRS 16 Lease agreement standard, effective from January 1, 2019. Detailed description is included in Accounting Principles section of this interim financial report.

REVIEW BY THE CEO

In the first quarter, QPR Software's business developed as planned in our strategy. The investments into our process mining software QPR ProcessAnalyzer were paying off as its net sales grew over 50%, in line with our mid-term strategic growth target. International software net sales in this business area recorded strong growth.

Process mining software is globally strengthening its position as an operational analytics tool, especially in large organizations segment. Analysis results are used, among others, for improving existing operations, process optimization and automatization as well as digital transformation.

In our strategy, we have defined consulting services supporting our software business as another significant source for growth. Net sales from these services grew 11% in the first quarter, in line with our expectations.

The competition in process and enterprise architecture modeling software and performance management software markets remained tight, as expected. Our net sales were smaller than in the equivalent period last year, when net sales included several significant performance management software deals in developing markets. In the Finnish modeling software market, we maintained our leading position, but saw increasing price competition especially in the public sector.

The outlook for 2019 remains unchanged, and we estimate our net sales to grow this year (2018: EUR 10,047 thousand), driven by international process mining software net sales, as well as net sales from consulting services supporting our software business.

Jari Jaakkola
CEO

NET SALES DEVELOPMENT

January – March 2019

Net sales in the first quarter were EUR 2,748 thousand (2,882). The share of recurring revenue was 53% of net sales (57).

Software license net sales amounted to EUR 1,034 thousand (1,136) and decreased 9%, due to a decline in international channel net sales of performance management software compared to a very strong January – March 2018. On the other hand, process mining software QPR ProcessAnalyzer's license net sales grew significantly.

Software maintenance net sales decreased 9% to EUR 644 thousand (711), mainly due to decrease in maintenance revenue in international channel business.

Cloud services net sales amounted to EUR 264 thousand (306). The decrease was due to a pricing change we implemented in the Finnish public sector modeling software cloud services. With this new pricing, we aim at significant increase in users of this software in the long term. Consulting net sales amounted to EUR 806 thousand (728) and increased 11%. Especially increased consulting net sales to the customers using our modeling software.

Consolidated net sales in Finland decreased 5% and international net sales 4%. Of the Group net sales, 55% (55) derived from Finland, 33% (30) from the rest of Europe (including Russia and Turkey) and 12% (15) from the rest of the world.

NET SALES BY PRODUCT GROUP

FINANCIAL PERFORMANCE

January – March 2019

The Group's operating result was EUR 187 thousand (400) and represented 7% of net sales (14). Besides a moderate decline in net sales, the decrease in operating result was due to outlays in our growth business areas. Increased headcount led to 9% growth in personnel expenses, which were EUR 1,693 thousand (1,551).

The Group's fixed costs were EUR 2,299 thousand (2,089) and increased 10% compared to the corresponding period in the previous year. Personnel expenses represented 74% (74) of the fixed costs. Credit losses, included in fixed costs, were EUR 9 thousand (5).

Result before taxes was EUR 167 thousand (211) and result for the period was EUR 141 thousand (124). Taxes recorded for the period were EUR 26 thousand (86). Earnings per share (fully diluted) were EUR 0.012 (0.010).

FINANCE AND INVESTMENTS

Cash flow from operating activities was EUR 941 thousand (1,597) in the first quarter. The decreased cash flow from operating activities resulted mainly from increased working capital, required by growth in our international business. Cash and cash equivalents at the end of the reporting period were EUR 1,204 thousand (1,704).

Net financial expenses in the review period were EUR 20 thousand (189) and included currency exchange losses of EUR 19 thousand (189). Exceptionally large currency exchange losses in the previous year were due to liquidation of the Group's subsidiary in Russia.

Investments in the first quarter totaled EUR 240 thousand (210). Investments were mainly related to product development expenditure.

The Group's financial position is strong. At the end of the quarter, the Company had no interest-bearing financing loans. The gearing ratio was -24% (-56). The change in net debt is due to the adoption of the new IFRS 16 accounting standard in the beginning of this year. At the end of the quarter, the equity ratio was 53% (57).

PRODUCT DEVELOPMENT

QPR innovates and develops software products that analyze, measure and model operations in organizations. The Company develops the following software products: QPR ProcessAnalyzer, QPR EnterpriseArchitect, QPR ProcessDesigner, and QPR Metrics.

In the first quarter, product development expenses were EUR 584 thousand (501), or 21% of net sales (17). Product development expenses worth EUR 169 thousand (196) were capitalized. The amortization of capitalized product development expenses was EUR 203 thousand (187). The amortization period for capitalized product development expenses is four years

PERSONNEL

At the end of the quarter, the Group employed a total of 83 persons (79). The average number of personnel during the quarter was 84 (78).

The average age of employees is 41.8 (40.2) years. Women account for 23 % (21) of employees, men for 77% (79). 17% (18) work in sales and marketing, 41% (42) in consulting and customer care, 32% (32) in product development, and 10% (9) in administration.

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 mainly on the Group and business unit net sales performance.

The Board of Directors of QPR Software Plc resolved in its meeting on January 29, 2019 to launch a new key employee stock option plan, based on an authorization granted by the Annual General Meeting. The purpose of the stock options is to encourage the key employees to work on a long-term basis to increase the shareholder value and to retain the key employees at the Company.

The maximum total number of stock options issued is 910,000 and they entitle their owners to subscribe for a maximum total of 910,000 new shares in the Company or existing shares held by the Company. The stock options are issued gratuitously. Of the stock options, 437,000 are marked with the symbol 2019A and 473,000 are marked with the symbol 2019B. The share subscription period, for stock options 2019A, will be January 1, 2022 – January 31, 2023, and for stock options 2019B, January 1, 2023 – January 31, 2024.

The number of shares subscribed by exercising stock options issued corresponds to a maximum total of 6.81% of all shares and votes of the shares in the Company after the potential share subscriptions, if new shares are issued in the share subscription. After the share subscriptions with stock options, the number of the Company’s shares may be increased by a maximum total of 910,000 shares, if new shares are issued in the share subscription. The share subscription price for stock options 2019A is EUR 1.70 per share, which corresponded to the market price of the Company’s share at the time of launching the option plan. The share subscription price for stock options 2019B is EUR 2.55 per share, which corresponds to the market price of the Company’s share with an addition of 50%.

STRATEGY

Our target is to grow our net sales by an average of 15 – 20% per annum over the next three years. The target is mainly based on growth in international software sales and consulting services supporting our software business in Finland. We foresee significant growth potential especially in the process mining business, where we aim for an annual growth of more than 50%.

We innovate, develop and sell software and related services aimed at analyzing, measuring and modeling operations in organizations. Furthermore, we offer customers consulting services in operational development and digital business optimization.

We will further accelerate product development by increasing our resources in a controlled manner. In software development, we place special focus on excellent user experience.

We focus our product development to meet the challenges our client organizations face, especially in leading and developing their operations in a digitalizing world. A special focus area for development is process mining, where our target is to gain a significant share in the rapidly growing process mining and analytics market.

In the next few years, we seek growth especially in our international software sales. To reach this target, we will continue to increase our resources and investments in international marketing and sales.

We also actively seek strategic partnerships to strengthen our international software sales and product development.

SHARES AND SHAREHOLDERS

GOVERNANCE

The Annual General Meeting held on April 4, 2019 approved the Board's proposal that no dividend be paid for the financial year 2018.

The Annual General Meeting resolved that the number of Board Members is four (4) and re-elected Vesa-Pekka Leskinen and Topi Piela. as members of the Company's Board of Directors. As new member of the Board of Directors, Jarmo Rajala and Salla Vainio were elected. 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.

EVENTS AFTER THE REVIEW PERIOD

The Company has no significant events after the review period to be reported.

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 covering 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.

Approximately 61% of Group’s trade receivables were in euro at the end of the quarter (71). At the end of the quarter, the Company had not hedged its non-euro trade receivables.

FINANCIAL INFORMATION

In 2019, QPR Software will publish a half-year report and an interim report in English and Finnish on the following dates:

• Half-year Financial Report 1-6/2019: Thursday, August 1, 2019
• Interim Report 1-9/2019: Thursday, October 24, 2019

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.

CONSOLIDATED COMPREHENSIVE INCOME STATEMENT

CONSOLIDATED BALANCE SHEET

CONSOLIDATED CASH FLOW STATEMENT

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

NOTES TO INTERIM FINANCIAL STATEMENTS

ACCOUNTING PRINCIPLES

This report complies with requirements of IAS 34 ”Interim Financial Reporting”. Starting from the beginning of 2019, the Group has applied certain new or revised IFRS standards and IFRIC interpretations, as described in the Consolidated Financial Statements 2018.

As of beginning of 2019, in accordance with the new IFRS 16 Leases -standard, leases are recognized in the balance sheet as a right-of-use asset and a corresponding financial liability at the date at which the lease asset is available for the use by the Group. Lease payments are allocated in liabilities and financial expenses. The financial expense  is recognized in the income statement over the lease period. The right-of-use asset is depreciated on a straight-line basis over the the asset’s useful life or the shorter lease term. The lease liabilities are discounted at the borrowing average rate of 2% as of January 1, 2019. The Group has adopted the new IFRS 16 standard using modified retrospective approach and the comparative information has not been restated.

The Group leases mainly offices to be used as working premises. Rental contracts are typically made for fixed periods with possible extension options, or for an indefinite period with a notice period of typically less than a year. The Group continues to treat leases of 12 months or less and leases of low-value assets as other leases. Until end of the year 2018 leases of property, plant and equipment were classified as operating leases. Payments made under operating leases were recognized in the income statement on a straight-line basis over the period of the lease.

The change in the accounting policy affected the balance sheet items of January 1, 2019, as follows:
- material assets increased with the right-of-use asset by approximately EUR 560 thousand
- non-current liabilities increased by approximately EUR 280 thousand
- current liabilities increased by approximately EUR 280 thousand

The implementation of other new and revised requirements has not impacted the reported figures. For all other parts, the accounting principles and methods are the same as they were in the 2018 financial statements.

When preparing the consolidated financial statements, the 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.  

INTANGIBLE AND TANGIBLE ASSETS

PLEDGES AND COMMITMENTS

RECONCILIATION OF LEASE LIABILITY

LEASES

Due to the adoption of the new IFRS 16 Leases -standard, the balance sheet as at March 31, 2019 and the income statement of the reporting period January-March include the following items in right-of-use assets of material assets, lease liabilities, depreciation and interest expense:

CONSOLIDATED INCOME STATEMENT BY QUARTER                                       

GROUP KEY FIGURES