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QSC AG

Quarterly Report Aug 6, 2018

343_10-q_2018-08-06_ee726f1c-274a-44f9-9105-2f438f9ae309.pdf

Quarterly Report

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HALF-YEAR REPORT 1 January to 30 June 2018

KEY DATA

01/04/ – 30/06/ 01/04/ – 30/06/ 01/01/ – 30/06/ 01/01/ – 30/06/
€ million
2015
2018 2017 2018 2017
Revenues 92.1 87.2 186.2 175.9
EBITDA 9.0 9.7 18.2 20.2
Depreciation and amortisation 1 6.8 8.0 13.6 15.8
EBIT 2.3 1.7 4.6 4.4
Net income 0.5 0.5 1.3 1.1
Earnings per share 2
(in €)
0.00 0.00 0.01 0.01
Free cash fl ow 3.6 2.8 2.8 6.4
Capital expenditure (capex) 5.0 5.6 7.9 9.8
Capex ratio 3
(in %)
5.4 6.4 4.2 5.6
Liquidity 4
58.0
5
61.9
Shareholders' equity 91.3
4
89.5
5
Long-term liabilities 47.9
4
147.9
5
Short-term liabilities 4
146.5
5
59.6
Balance sheet total 285.7
4
297.1
5
Equity ratio (in %) 32.0
4
30.1
5
Xetra closing price as of 30 June (in €) 1.40 1.74
Number of shares as of 30 June 124,172,487 124,172,487
Market capitalisation as of 30 June 173.8 216.1
Number of employees as of 30 June 1,305 1,371

Including non-cash share-based compensation.

Basic and diluted.

Ratio of capital expenditure to revenues.

4 As of 30 June 2018.

As of 31 December 2017.

02

QSC INCREASES REVENUES BY 6% IN FIRST HALF OF 2018

Revenues up to € 186.2 million. Like in the first quarter, QSC also generated year- on-year revenue growth in the second quarter of 2018. At the end of the fi rst six months, this key fi gure totalled € 186.2 million, as against € 175.9 million in the fi rst half of 2017.

36% growth in Cloud business. The Cloud segment showed the strongest growth in percentage terms once again in the fi rst half of 2018. Revenues here rose to € 15.6 million, up from € 11.5 million in the previous year, with both areas of activity – cloud services and Internet of Things (IoT) – making major contributions to this growth.

Revenues with TC services up € 13.1 million. The Telecommunications (TC) segment stood out from the rest in terms of its absolute growth volumes: Revenues here rose to € 103.8 million in the fi rst half of 2018, up from € 90.7 million in the previous year. QSC particularly benefi ted from high demand in the international voice termination business.

Annual General Meeting approves spin-off of TC business. A large majority of shareholders at the Annual General Meeting on 12 July 2018 approved the spin-off of the TC business to a standalone company. Plusnet GmbH, a wholly owned subsidiary, can now focus all of its energies on its core business and, working together with strategic partners, access new potential.

Consolidated net income up 18%. QSC improved its consolidated net income year-on-year from € 1.1 million to € 1.3 million in the fi rst half of 2018. Over the same period, EBIT rose from € 4.4 million to € 4.6 million. As expected, EBITDA came to € 18.2 million, compared with € 20.2 million in the fi rst half of 2017.

QSC expects revenues at least at upper end of € 345 million to € 355 million range. Given its robust fi rst-half performance, QSC now expects its full-year revenues for 2018 to at least reach the upper end of the € 345 million to € 355 million range. The Company still expects to post EBITDA of between € 35 million and € 40 million and free cash fl ow of more than € 10 million.

"Our operating business is benefi ting from implementation of the new vertical organisational structure. We now expect the spin-off of our TC business into a standalone subsidiary to provide additional momentum."

Jürgen Hermann, Chief Executive Off icer

"Our key earnings and fi nancial fi gures are developing in line with expectations. But we are continuing to reorganise our structures, particularly in the Outsourcing business. In this respect, we will have to maintain strict cost discipline in the future as well."

Stefan A. Baustert, Chief Financial Off icer

LETTER TO OUR SHAREHOLDERS

With year-on-year growth of 6%, QSC's total revenues for the fi rst six months pointed in the right direction! Growth was driven above all by success in the Cloud and Telecommunications segments. In our Cloud business we are attracting new customers, such as most recently the fi nancial services provider PEAC Germany, previously IKB Leasing, and also gradually extending the range of services we off er to existing customers. Our advantage here is that our multi-cloud enables us to combine individually structured private cloud platforms, such as our Pure Enterprise Cloud, with standardised public clouds solutions from major providers such as Microsoft, Amazon and Google, and all that in line with customers' specifi c wishes. QSC was very early to detect this trend and founded its own multi-cloud unit at the beginning of 2017 already. That move is now paying off .

Q-loud, our IoT subsidiary, is also positioning itself ever more successfully with its extensive range of software and hardware expertise. This is refl ected not least in rising demand and growing numbers of satisfi ed customers. The "retrofi t" approach, which draws on easy solutions to make older appliances fi t for digitisation, is especially popular. Furthermore, our experts at Q-loud are also in demand as partners when it comes to connecting IoT solutions with SAP systems. This enables data collected via sensors to be evaluated for business management purposes, and that in real time. Links of this kind are of great interest, especially for smart energy management at large properties.

The growth in the Telecommunications segment shows that demand for traditional data and voice services remains robust. Not only that, it underlines the increasing attractiveness of new markets. At QSC, this latter factor is illustrated above all by cooperation agreements signed with municipal utility companies that are expanding their fi bre optic networks. In June 2018, for example, the regional energy supplier "eins" in Saxony opted to work with QSC. In future, we will there fore be supplying voice services for the fi bre optic broadband network in Chemnitz, to which around half of that city's companies and households are already connected. At present, however, the high volumes in the TC business are due above all to increased demand from resellers for international voice termination services. Corporate customers are also showing ever greater interest in TC services.

Against this backdrop, the spin-off of the TC business into a standalone company marks the beginning of a new era. This way, our TC unit can focus all of its energies on its core business and, together with strategic partners, access completely new potential – potential that will benefi t Plusnet, and thus QSC as well.

Despite these positive developments, QSC has yet to achieve a turnaround in its revenue performance. We expect the higher level of demand shown by resellers for international voice termination services to weaken. In our Outsourcing business, the restructuring process aimed at achieving greater eff iciency will have to continue as two major customers have opted to change IT service provider. The associated revenues will no longer be included in the fi gures for the second half and from early 2019 respectively.

We are nevertheless optimistic for the current fi nancial year. We now expect our full-year revenues to at least reach the upper end of the € 345 million to € 355 million range communicated at the beginning of the year. Our EBITDA should amount to between € 35 million and € 40 million and our free cash fl ow should exceed € 10 million. That all marks a further step on the way to sustainably positive growth.

Cologne, August 2018

Jürgen Hermann Stefan A. Baustert Chief Executive Off icer Chief Financial Off icer

INTERIM CONSOLIDATED REPORT

Business Performance

Revenues up 6% to € 186.2 million in fi rst half of 2018. Like in the fi rst quarter, QSC generated year-on-year revenue growth in the second quarter of 2018. This was driven by the two segments of Cloud and Telecommunications. At the end of the fi rst six months, the Company's revenues totalled € 186.2 million, as against € 175.9 million in the fi rst half of 2017. Given this robust performance in the fi rst half of 2018, QSC now expects to generate full-year revenues at least at the upper end of the € 345 million to € 355 million range.

Revenues

(€ million)

36% growth in Cloud business. Revenues in the Cloud segment increased from € 11.5 million to € 15.6 million in the fi rst half of 2018. This growth was due to success in both of the segment's areas of activity, namely cloud services and IoT.

In early June 2018, for example, PEAC Germany, formerly IKB Leasing, commissioned QSC to migrate its existing IT landscape to a multi-cloud environment. In future, this company will be centrally procuring traditional IT applications and sector-specifi c applications from QSC's Pure Enterprise Cloud. By contrast, Microsoft applications will be provided from the global Microsoft Off ice 365 Cloud. As a certifi ed Cloud Solution Partner to Microsoft, QSC will also see to integrating and managing these applications. This way, QSC will orchestrate and be responsible for PEAC Germany's multi-cloud IT operations model in future. Other customers are also increasingly drawing on QSC's multi-cloud expertise and combining bespoke solutions from the Pure Enterprise Cloud with public cloud applications.

Q-loud, QSC's IoT subsidiary, demonstrated its all-round software and hardware expertise in numerous projects in the high-growth areas of smart home and smart city in the fi rst half of 2018. This company provides hardware such as sensors and chips on the one hand and its own software- based cloud platform on the other, as well as individually developed products, all of which on a turnkey basis. This way, it off ers easy solutions to make traditional appliances fi t for the digital age. The EnergyCam, for example, photographs the current status of analogue meters on heating sys tems, converts these readings into digital data and thus enables them to be used in all IT proces ses. This easy "retrofi t" has, for example, provided a convincing solution at Munich Airport since April 2018.

Cloud revenues

(€ million)

H1 / 2018 15.6
H1 / 2017 11.5

Gradual introduction of Cloud services at large Outsourcing customer. Consistent with expectations, the Outsourcing revenues of € 47.6 million reported for the fi rst half of 2018 fell short of the previous year's fi gure of € 53.0 million. This reduction was due in part to changes in the customer base. In 2017, one major customer opted to work in future with an IT services provider with global operations. Not only that, the process of migrating existing customers to the Cloud has continued.

The extent to which traditional Outsourcing and Cloud services are gradually merging is underlined by the extension of the contract with QSC's longstanding customer Imperial Tobacco in June 2018. QSC will be taking care of major aspects of the company's IT operations and IT support in the next five years as well. This includes networking all German locations, providing applications and SAP services. Furthermore, QSC will in future be supporting Imperial Tobacco in implement ing its global digitisation strategy. To this end, QSC will gradually be introducing cloud and multi- cloud services and optimising the group's proprietary IT resources in a data centre and hosting environment.

Outsourcing revenues

Specialist staff in short supply in Consulting business. The Consulting segment generated revenues of € 19.2 million in the fi rst half of 2018, as against € 20.7 million in the previous year's period. Business activities here remain focused on consulting services for SAP software, and especially on introducing the new S/4HANA software generation. At present, insuff icient numbers of experts are available in the market for this area in particular. The year-on-year decline in revenues is due not least to the noticeable shortage of specialists. QSC is therefore increasingly relying on in-house training and development measures and is training rising numbers of employees for S/4HANA consulting.

TC business grows by 14%. TC revenues rose to € 103.8 million in the fi rst half of 2018, up from € 90.7 million in the previous year. This growth was driven above all by QSC's success in the international termination business with resellers, an area where it has benefi ted from a temporary favourable market constellation and the permanent benefi ts off ered by the extremely eff icient cost structure of its proprietary next generation network. Not only that, there is growing demand for TC services from corporate customers.

One increasingly important area of activity is QSC's cooperation with regional energy suppliers and municipal utility companies as they expand their fi bre optic networks. Most recently, for example, QSC reached agreement with the energy supplier "eins" to supply voice services in Chemnitz, a city where around half of companies and households already have access to a fi bre optic network.

By agreeing a new cooperation with Zattoo TV Solutions, in the fi rst half of 2018 QSC also extend ed its range of services for regional energy suppliers and municipal utility companies. These are now able to provide a triple play off ering of IP-based data, voice and TV services. To this end, QSC is supplementing its existing white label solutions with the IPTV services off ered by Zattoo, Europe's leading provider.

Telecommunications revenues

(€ million)

Annual General Meeting approves spin-off of TC business. A large majority of shareholders at the Annual General Meeting on 12 July 2018 approved the spin-off of the TC business to a standalone company. Plusnet GmbH, a wholly owned subsidiary, can now focus all of its energies on its core business and, working together with strategic partners, access new potential.

Business Framework

Robust developments in ICT sector. The threat of a global trade war is a factor that, more than any other, is unsettling ever more companies in Germany. The ifo Business Climate Index, one of the country's key economic indicators, fell in all three categories, namely "Climate", "Situation" and "Expectations", in the fi rst half of 2018. By July 2018, the ZEW Economic Expectations Index had even reached its lowest level since August 2012.

To date, the ICT sector has hardly felt any eff ects of this uncertainty. Demand is on the increase and is being driven above all by the ongoing digitisation of the Germany economy. The Bitkom sector association expects IT revenues in Germany this year to grow by 3.1% to € 88.8 billion.

62% of SMEs building on multi-cloud scenarios. Key growth drivers include cloud services and IoT, i.e. the two areas of activity in QSC's Cloud segment. Within the cloud business, multi-cloud solutions combining the benefi ts of public and private clouds are increasingly gaining ground. In a study compiled by the market research institute Crisp Research, 62% of small and medium enterprises (SMEs) stated that they were drawing on multi-cloud scenarios. The crucial motivation here was to ensure the availability of fl exible and scalable IT that was capable of being adapt ed to new business models more quickly than in the past.

Numerous new business models, especially in industry, are drawing on the Internet of Things. As a result, this market is likely to explode in the years ahead. The latest forecasts assume a volume of € 50 billion for the German business customer market by 2020. According to a Bitkom survey, IoT platforms are now a topic at 8 out of 10 companies. SMEs in particular are now beginning to look into introducing the new technology. Here, QSC can draw on its advantages as a mediumsized player and build partnerships of equals. With its extensive IoT hardware and software expertise, the Q-loud subsidiary is already promoting numerous projects in an SME environment.

Earnings Performance

Growth necessitates higher cost of revenues. Given the increase in revenues, the cost of revenues rose from € 129.6 million in the previous year's period to € 141.5 million in the fi rst half of 2018. This rise chiefl y refl ects the increased weighting of TC revenues with resellers in the international voice termination business. These revenues are characterized by preliminary services procured from other grid operators. Gross profi t amounted to € 44.7 million in the fi rst half of the current fi nancial year, as against € 46.3 million in the previous year's period. Sales and marketing expenses rose by € 1.0 million year-on-year to € 13.8 million. This increase was due to the stepping up of sales eff orts in the new vertical organisational structure. By contrast, general and administrative expenses fell by € 0.9 million to € 12.4 million. Due to the higher cost of revenues, EBITDA decreased from € 20.2 million in the previous year's period to € 18.2 million in the fi rst half of the current fi nancial year. EBITDA is defi ned as earnings before interest, taxes, amortisation of deferred non-cash share-based compensation, depreciation/amortisation and impairment losses on customer-related inventories and depreciation/ amortisation of property, plant and equipment and intangible assets.

Consolidated net income rises by 18%. As planned, depreciation and amortisation fell to € 13.6 million in the fi rst half of 2018, down from € 15.8 million in the previous year's period. As a result, operating earnings (EBIT) improved to € 4.6 million, compared with € 4.4 million in the fi rst half of 2017. Consolidated net income rose over the same period from € 1.1 million to € 1.3 million.

Consolidated net income

(€ million)

Earnings Performance by Segment

Cloud segment posts its fi rst double-digit margin. Substantial revenue growth enabled the Cloud business to demonstrate its scalability in the first half of 2018. Additional revenues of € 4.1 million only required additional cost of revenues amounting to € 1.4 million. The latter key fi gure rose from € 9.5 million year-on-year to € 10.9 million. This enabled the segment to more than double its gross profi t to € 4.7 million, up from € 1.9 million in the fi rst half of 2017. As sales and marketing expenses also only rose slightly, the segment contribution improved to € 1.8 million, as against € -0.8 million in the previous year's period. This corresponds to a segment margin of 12%.

Ongoing restructuring of Outsourcing business. Given the decline in revenues, QSC pressed ahead with restructuring its Outsourcing business in the fi rst half of 2018. Among other measures, the Company reduced the number of employees working in this area. The non-recurring expenses associated with this measure were one reason why the cost of revenues only fell by € 0.7 million compared with the previous year to € 39.0 million in the fi rst half of 2018. As a result, gross profi t fell from € 13.3 million year-on-year to € 8.6 million. The segment contribution decreased from € 10.5 million to € 6.0 million and the segment margin now amounts to 13%.

Rising margin in Consulting business. In its personnel-intensive Consulting business, QSC was able to generate a convincing segment margin of 17% in the fi rst half of 2018. This was due in particular to ongoing eff orts to optimise capacity utilisation levels among existing employees. The segment contribution rose to € 3.3 million, as against € 2.9 million in the fi rst half of 2017. Notwithstanding the decline in revenues, gross profi t also increased, improving from € 3.4 million year-on-year to € 3.8 million in the fi rst half of 2018.

Telecommunications generates highest segment margin. The substantial TC revenue growth seen in the fi rst half of 2018 was accompanied by a higher cost of revenues, which rose from € 63.0 million year-on-year to € 76.2 million. This signifi cant increase was due to the greater share of revenues with resellers in the international voice termination business, an area characterised by high preliminary services. In view of this, the gross profi t € 27.6 million in the fi rst half of 2018 was virtually unchanged on the previous year's fi gure of € 27.7 million. Given increased sales eff orts, the segment contribution came to € 19.8 million in the fi rst half of 2018, as against € 20.9 million in the previous year. At 19%, however, the segment margin was still higher than in any other segment.

Financial and Net Asset Position

QSC generates free cash fl ow of € 2.8 million in fi rst half of 2018. In line with expectations, the free cash fl ow amounted to € 2.8 million in the fi rst six months of the current fi nancial year, as against € 6.4 million in the previous year. QSC calculates this key management fi gure as the change in net liquidity/debt before acquisitions and distributions. The table below shows the relevant parameters at the two balance sheet dates on 30 June 2018 and 31 December 2017:

€ million 30/06/2018 31/12/2017
Liquidity 58.0 61.9
Long-term other fi nancial liabilities (35.0) (135.2)
Short-term other fi nancial liabilities (95.1) (1.6)
Interest-bearing liabilities (130.1) (136.8)
Net debt (72.1) (74.9)

It can be seen that that liquidity fell by € 3.9 million to € 58.0 million in the fi rst half of 2018. Over the same period, QSC reduced its interest-bearing fi nancial liabilities by € 6.7 million. Within this item, the tranches of the promissory note loan due for repayment in the second quarter of 2019 were reclassifi ed from the long-term to the short-term portion of other fi nancial liabilities. Net debt fell by € 2.8 million to € -72.1 million as of 30 June 2018.

Capital expenditure still at moderate level. QSC invested € 7.9 million in the fi rst half of 2018, as against € 9.8 million in the previous year's period. Of this total, 45% involved customer-related investments, including connections for new customers. A further total of 45% was channelled into technology, and thus into the ongoing process of modernising and optimising the Company's infrastructure. The remaining 10% related to other items of property, plant and equipment and other intangible assets.

Equity ratio rises to 32%. QSC's balance sheet as of 30 June 2018 was characterised by higher equity and one reclassification of liabilities. The increase in equity to € 91.3 million, up from € 89.5 million as of 31 December 2017, was due above all to the rise in consolidated net income. The equity ratio rose by 2 percentage points over the same period to 32%.

Long-term liabilities fell to € 47.9 million as of 30 June 2018, down from € 147.9 million at the end of 2017. This reduction was solely due to the reclassifi cation of tranches of the promissory note loan maturing in May 2019 and previously reported under other fi nancial liabilities. Conversely, short-term liabilities rose to € 146.5 million, up from € 59.6 million as of 31 December 2017.

QSC increases syndicated loan. QSC successfully negotiated an increase in its syndicated loan facility with the lending banks in the fi rst half of 2018. Originally agreed at € 70 million in 2016, this facility has now been raised to € 100 million, thus prematurely safeguarding fi nancing for the tranches of the promissory note loan due to mature next year.

On the asset side of the balance sheet, depreciation and amortisation reduced the value of longterm assets by € 5.0 million to € 169.9 million. Short-term assets decreased by € 6.3 million to € 115.9 million as of 30 June 2018.

Employees

1,305 employees as of 30 June 2018. The overall workforce contracted to 1,305 employees as of 30 June 2018, compared with 1,371 one year earlier, a development mainly due to the ongoing process of restructuring the organisation. By contrast, QSC also recruited additional experts, above all in its Cloud business. Personnel expenses fell to € 50.4 million in the fi rst half of 2018, down from € 51.5 million in the previous year.

Personnel expenses

(€ million)

Opportunity and Risk Report

No material change in opportunity and risk situation. The first half of 2018 did not witness any material changes in the opportunities and risks presented in the 2017 Annual Report. Just like other risks or erroneous assumptions, however, the risks listed there could lead future ac tual earnings to deviate from QSC's expectations. Unless they constitute historic facts, all disclo sures in this unaudited group interim report represent forward-looking statements. They are based on current expectations and forecasts concerning future events and may therefore change over time.

Outlook

QSC expects revenues at least at upper end of € 345 million to € 355 million range. Given its robust fi rst-half performance, QSC now expects its full-year revenues for 2018 to at least reach the upper end of the € 345 million to € 355 million range. The Company still expects to post EBITDA of between € 35 million and € 40 million and a free cash fl ow of more than € 10 million. The highest revenue growth in the second half of the year will once again be in the Cloud business. On the other hand, the TC business is expected to normalise once more after the 14% growth reported for the fi rst six months. Demand for international voice termination services from resellers already declined in the second quarter of 2018. In line with expectations, the loss of a major customer already announced previously will reduce second-half revenues in the Outsourc ing segment. This will require the Company to make further organisational adjustments. QSC expects to see a further stabilisation in its Consulting business.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Income (unaudited)

01/04/ – 30/06/ 01/04/ – 30/06/ 01/01/ – 30/06/ 01/01/ – 30/06/
2018 2017 2018 2017
Net revenues 92,086 87,160 186,165 175,891
Cost of revenues (68,808) (64,240) (141,492) (129,555)
Gross profi t 23,278 22,920 44,673 46,336
Sales and marketing expenses (7,763) (6,873) (13,772) (12,845)
General and administrative expenses (6,422) (6,412) (12,393) (13,262)
Depreciation and amortisation
(including non-cash share-based compensation) (6,758) (7,963) (13,595) (15,843)
Other operating income 299 368 580 1,027
Other operating expenses (371) (313) (850) (1,056)
Operating profi t (EBIT) 2,263 1,727 4,643 4,357
Financial income 20 23 92 70
Financial expenses (1,086) (1,166) (2,165) (2,350)
Net income before income taxes 1,197 584 2,570 2,077
Income taxes (744) (92) (1,265) (950)
Net income 453 492 1,305 1,127
Attribution of net income
Owners of the parent company 516 550 1,432 1,243
Non-controlling interests (63) (58) (127) (116)
Earnings per share (basic) in € 0.00 0.00 0.01 0.01
Earnings per share (diluted) in € 0.00 0.00 0.01 0,01

Consolidated Statement of Comprehensive Income (unaudited)

01/04/ – 30/06/ 01/04/ – 30/06/ 01/01/ – 30/06/ 01/01/ – 30/06/
2018 2017 2018 2017
Net income for the period 453 492 1,305 1,127
Other comprehensive income
Line items that are not reclassifi ed in the income statement
Actuarial gains (losses) from defi ned benefi t pension plans - - - -
Tax eff ect - - - -
Line items that are not reclassifi ed in the income statement - - - -
Line items that might subsequently be reclassifi ed
in the income statement
Fair value measurement of cash fl ow hedge 207 204 402 498
Tax eff ect (67) (66) (130) (163)
Line items that might subsequently be reclassifi ed
in the income statement 140 138 272 335
Total fair value changes (net of tax) recognised directly 140 138 272 335
Total comprehensive income for the period 593 630 1,577 1,462
Attribution of total comprehensive income
Owners of the parent company 656 688 1,704 1,578
Non-controlling interests (63) (58) (127) (116)

Consolidated Balance Sheet

30/06/2018
(unaudited)
31/12/2017
(audited)
ASSETS
Long-term assets
Property, plant and equipment 54,482 57,481
Land and buildings 22,701 23,528
Goodwill 55,568 55,568
Other intangible assets 23,579 25,349
Trade receivables 2,124 2,461
Prepayments 3,745 2,549
Other long-term assets 158 156
Deferred tax assets 7,536 7,806
Long-term assets 169,893 174,898
Short-term assets
Trade receivables 49,107 52,278
Prepayments 7,326 6,809
Inventories 402 649
Other short-term assets 1,032 569
Cash and cash equivalents 57,984 61,881
Short-term assets 115,851 122,186
TOTAL ASSETS 285,744 297,084
30/06/2018
(unaudited)
31/12/2017
(audited)
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' equity
Issued capital 124,172 124,172
Capital surplus 143,971 143,787
Other capital reserves (2,009) (2,281)
Accumulated defi cit (174,180) (175,612)
Equity attributable to owners of the parent company 91,954 90,066
Non-controlling interests (665) (538)
Shareholders' equity 91,289 89,528
Liabilities
Long-term liabilities
Other fi nancial liabilities 35,037 135,244
Accrued pensions 5,745 5,924
Other provisions 3,032 3,031
Trade payables and other liabilities 3,785 3,357
Deferred tax liabilities 322 392
Long-term liabilities 47,921 147,948
Short-term liabilities
Trade payables and other liabilities 44,478 46,896
Other fi nancial liabilities 95,064 1,577
Other provisions 2,760 7,388
Accrued taxes 2,226 1,669
Deferred income 2,006 2,078
Short-term liabilities 146,534 59,608
Liabilities 194,455 207,556
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 285,744 297,084

Consolidated Statement of Changes in Equity (unaudited)

Equity attributable to equity holders of QSC AG
Other capital reserves
Issued capital Capital surplus Actuarial
gains (losses)
Cash fl ow
hedge reserve
Balance as of 1 January 2018 124,172 143,787 (1,350) (931)
Net income for the period - - - -
Other comprehensive income
for the period, net of tax - - - 272
Total comprehensive income - - - 272
Non-cash share-based compensation - 184 - -
Balance as of 30 June 2018 124,172 143,971 (1,350) (659)
Balance as of 1 January 2017 124,172 143,217 (1,923) (1,570)
Net income for the period - - - -
Other comprehensive income
for the period, net of tax - - - 335
Total comprehensive income - - - 335
Dividends - - - -
Non-cash share-based compensation - 274 - -
Balance as of 30 June 2017 124,172 143,491 (1,923) (1,235)
Accumulated Total Non-controlling Total equity
defi cit interests
(175,612) 90,066 (538) 89,528 Balance as of 1 January 2018
1,432 1,432 (127) 1,305 Net income for the period
Other comprehensive income
- 272 - 272 for the period, net of tax
1,432 1,704 (127) 1,577 Total comprehensive income
- 184 - 184 Non-cash share-based compensation
(174,180) 91,954 (665) 91,289 Balance as of 30 June 2018
(177,223) 86,673 (325) 86,348 Balance as of 1 January 2017
1,243 1,243 (116) 1,127 Net income for the period
Other comprehensive income
- 335 - 335 for the period, net of tax
1,243 1,578 (116) 1,462 Total comprehensive income
(3,725) (3,725) - (3,725) Dividends
- 274 - 274 Non-cash share-based compensation
(179,705) 84,800 (441) 84,359 Balance as of 30 June 2017

Consolidated Statement of Cash Flows (unaudited)

01/01/ – 30/06/ 01/01/ – 30/06/
2018 2017
Cash fl ow from operating activities
Net income before income taxes 2,570 2,077
Depreciation and amortisation of long-term assets 13,411 15,569
Other non-cash income and expenses 919 402
Gains from disposal of fi xed assets (28) (21)
Income tax paid (459) (2,645)
Income tax received 9 2,058
Interest received 77 414
Net fi nancial expenses 2,073 2,280
Changes in provisions (4,936) (2,496)
Changes in trade receivables 2,773 (468)
Changes in trade payables 1,002 2,543
Changes in other assets and liabilities (4,247) (618)
Cash fl ow from operating activities 13,164 19,095
Cash fl ow from investing activities
Purchase of intangible assets (3,568) (2,231)
Purchase of property, plant and equipment (4,822) (8,327)
Proceeds from sale of property, plant and equipment 19 29
Proceeds from sale of a subsidiary,
less liquid funds thereby disposed of - (430)
Cash fl ow from investing activities (8,371) (10,959)
Cash fl ow from fi nancing activities
Dividends paid - (3,725)
Issuance of convertible bonds (1) 5
Repayment of loans (5,912) (12,683)
Interest paid (2,631) (3,058)
Repayment of liabilities under fi nancing
and fi nance lease arrangements (146) (1,163)
Cash fl ow from fi nancing activities (8,690) (20,624)
Change in cash and cash equivalents (3,897) (12,488)
Cash and cash equivalents as of 1 January 61,881 67,781
Cash and cash equivalents as of 30 June 57,984 55,293

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Company Information

QSC AG is digitising the German SME sector. With decades of experience and expertise in its Cloud, Internet of Things, Consulting, Telecommunications and Colocation businesses, QSC accompanies its customers securely into the digital age. The cloud-based provision of all services off ers increased speed, fl exibility, and availability. The Company's TÜV and ISO-certifi ed data centres in Germany and its nationwide All-IP network form the basis for maximum end-to-end quality and security. QSC's customers benefi t from one-stop innovative products and services that are marketed both directly and via partners.

QSC is a stock corporation registered in the Federal Republic of Germany. Its legal domicile is Mathias-Brüggen-Strasse 55, 50829 Cologne, Germany. The Company is registered in the Commercial Register of Cologne District Court under number HRB 28281. QSC has been listed on the Deutsche Börse stock exchange since 19 April 2000 and, following the reorganisation of the stock market, in the Prime Standard since the beginning of 2003.

Accounting Policies

1 BASIS OF PREPARATION

These condensed interim consolidated fi nancial statements of QSC AG and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) and the interpretations of the International Financial Reporting Interpretations Committee (IFRIC), taking due account of International Accounting Standard (IAS) 34 "Interim Financial Reporting". The interim consolidated fi nancial statements do not include all notes and disclosures required of full year-end fi nancial statements and should therefore be read in conjunction with the consolidated fi nancial statements as of 31 December 2017.

Based on the Management Board's assessment, the interim consolidated fi nancial statements contain all adjustments necessary to provide a true and fair view of the Group's net assets, fi nancial and earnings position. The results for the reporting period ending on 30 June 2018 do not necessarily provide an indication of the future development in results.

With the exception of the accounting standards IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, both of which required application from 1 January 2018, the accounting policies applied in preparing these interim consolidated are basically consistent with those applied in the consolidated fi nancial statements for the 2017 fi nancial year. Income tax expenses for the interim reporting period have been calculated using the eff ective tax rate expected for the fi nancial year as a whole.

Those amendments to IFRSs requiring mandatory application from the 2018 fi nancial year onwards have not had any implications for the interim fi nancial statements as of 30 June 2018. The preparation of interim fi nancial statements in accordance with IFRS requires a certain degree of reference to estimates and judgements aff ecting the assets and liabilities as recognised and the disclosures made concerning contingent assets and liabilities as of the reporting date. The amounts actually arising may deviate from such estimates.

There have been no material changes in the Management Board's assessments concerning the application of accounting policies compared with the consolidated fi nancial statements as of 31 December 2017.

Unless otherwise stated, all amounts are rounded up or down to the nearest thousand euro amount (€ 000s).

These condensed interim consolidated fi nancial statements, including the interim management report, have neither been audited pursuant to § 317 of the German Commercial Code (HGB) nor subject to any audit review by any suitably qualifi ed person.

2 SCOPE OF CONSOLIDATION AND AMENDMENTS UNDER COMPANY LAW

Alongside QSC AG, the scope of consolidation includes all of the subsidiaries it controls. These subsidiaries are fully consolidated.

3 FINANCIAL INSTRUMENTS

Disclosures on the balance sheet. No separate disclosures are provided for fair values as the carrying amounts largely correspond to market values. This is not the case for the promissory note loan included in other fi nancial liabilities, whose market value as of 30 June 2018 exceeded its carrying amount by € 2.9 million.

€ 000s Carrying
amount
Loans and
receivables
Fair value – hedging
instruments
Other fi nancial
liabilities
30 June 2018
Assets not measured at fair value
Cash and cash equivalents 57,984 x
Long-term trade receivables 2,124 x
Short-term trade receivables 49,107 x
Liabilities measured at fair value
Interest swaps – hedge accounting 1,215 x
Liabilities not measured at fair value
Trade payables and other liabilities 38,774 x
Other fi nancial liabilities 130,101 x
€ 000s Carrying
amount
Loans and
receivables
Fair value – hedging
instruments
Other fi nancial
liabilities
31 December 2017
Assets not measured at fair value
Cash and cash equivalents 61,881 x
Long-term trade receivables 2,461 x
Short-term trade receivables 52,278 x
Liabilities measured at fair value
Interest swaps – hedge accounting 1,617 x
Liabilities not measured at fair value
Trade payables and other liabilities 37,330 x
Other fi nancial liabilities 136,820 x

Disclosures on fair values measured on a recurring basis. At the end of the reporting period, QSC AG determines whether any reclassifi cations between the measurement hierarchy levels are necessary. No reclassifi cations were made in the reporting period from 1 January 2018 to 30 June 2018.

Class Measurement
hierarchy level
Fair value
in € 000s at
30 June 2018
Fair value
in € 000s at
31 Dec. 2017
Description of measurement method
Liabilities due to banks 2 132,758 140,049 The liabilities are measured by fi rst forecasting the expected
cash fl ows based on the provisions of the respective contracts
and then discounting these to account for risk. The risk-ad
justed discount rate comprises an interbank interest rate
(6M Euribor) and a QSC-specifi c risk premium derived from
credit default swap rates for a peer group. The peer group has
a BBB rating.
Interest swaps – 2 1,215 1,617 The fair value of interest derivatives is determined on the
hedge accounting basis of present value models including market information
(interest structure curves). The fair value measurement of
interest swaps was performed by the intermediary bank;
the fair value is derived either from the mid-market price or,
if expressed as a bid and ask price, from the indicative price at
which the bank would have bought back and sold the fi nan cial
instrument at the close of business on the relevant market
place on the respective measurement date.

4 REVENUES

Breakdown of revenues. The tables below provide a breakdown of revenues by geographical region and distribution channel. Furthermore, the tables reconcile revenues with the segments presented in Note 5.

€ 000s Geographical region
Germany Outside Germany Total
01/01/ – 30/06/ 01/01/ – 30/06/
01/01/ – 30/06/
01/01/ – 30/06/ 01/01/ – 30/06/ 01/01/ – 30/06/
2018 2017 2018 2017 2018 2017
Segments
Telecommunications 97,990 88,434 5,843 2,240 103,833 90,674
Outsourcing 47,240 52,588 338 421 47,578 53,009
Consulting 18,398 19,822 785 911 19,183 20,733
Cloud 15,380 11,325 191 150 15,571 11,475
179,008 172,169 7,157 3,722 186,165 175,891
€ 000s Distribution channel
End customer Reseller Total
01/01/ – 30/06/ 01/01/ – 30/06/ 01/01/ – 30/06/ 01/01/ – 30/06/ 01/01/ – 30/06/ 01/01/ – 30/06/
2018 2017 2018 2017 2018 2017
Segments
Telecommunications 42,140 40,020 61,693 50,654 103,833 90,674
Outsourcing 47,578 53,009 - - 47,578 53,009
Consulting 19,183 20,733 - - 19,183 20,733
Cloud 15,571 11,475 - - 15,571 11,475
124,472 125,237 61,693 50,654 186,165 175,891

5 SEGMENT REPORTING

In accordance with the provisions of IFRS 8, the basis for identifying segments consists of the Company's internal organisational structure as used by corporate management for business administration decisions and performance assessments. This results in the following segments: Cloud, Outsourcing, Consulting and Telecommunications.

Cloud. QSC pools all activities relating to its Pure Enterprise Cloud (PEC) and the Internet of Things (IoT) in its Cloud segment. The Pure Enterprise Cloud, which has been developed on an in-house basis since 2015, comprises a modular system of cloud technologies, software solutions and service components, as well as network and infrastructure services. Furthermore, the Cloud segment also includes the IoT business activities pooled at Q-loud. This subsidiary of QSC off ers companies an extensive range of products and services enabling them to implement digital business models and network appliances in the Internet of Things. Its end-to-end range of services includes transformation consulting, software and hardware expertise, standard hardware, a proprietary IoT platform, security solutions and smart product manufacturing.

Outsourcing. This segment off ers traditional outsourcing services to companies wishing to outsource their IT and data storage to QSC. As soon as cloud-based outsourcing services are provid ed, the respective revenues are allocated to the Cloud segment. As well as IT service off erings, the Outsourcing segment also includes the underlying IP-VPNs necessary to guarantee end-toend quality.

Consulting. QSC advises companies on how to optimise their business processes with two key focuses on SAP and Microsoft. As an SAP full-service provider, in this segment QSC performs services in the fi elds of basic operations, application management, implementation, user support and maintenance, as well as in managing the necessary software licenses. The Microsoft consulting services range from needs analysis to consulting, design and implementation services through to operations and ongoing optimisation measures.

Telecommunications (TC). Here, QSC off ers a broad range of voice and data communication solu tions. These include internet connections with asymmetric ADSL2+ lines, symmetric SDSL lines and premium internet access via wireless local loop (WLL) networks. In this segment, QSC also off ers All-IP telephony connections (voice over IP) and corresponding telephony systems. Fur ther more, the range of services also includes further forms of voice telephony, including open call-by-call and preselect off erings and value added services.

The segment contribution is the key segment performance indicator referred to by the management. This is defined as EBITDA before general and administrative expenses and other operating income and expenses. For income statement purposes, the cost of revenues is thus allocated in full to the respective segment, as are sales and marketing expenses. The direct and indirect allocation of costs to individual segments is consistent with internal reporting and management structures. Indirect cost allocation is primarily based on resource utilisation by the respective segments. The Management Board does not receive any regular information about segment-specific capital expenditure, assets and liabilities, general and administrative expenses, depreciation and amortisation and other operating income and expenses as components of the respective segment earnings figures.

€ 000s Telecom
munications
Outsourcing Consulting Cloud Consolidated
Group
01/04/ – 30/06/2018
Net revenues 50,431 23,853 9,356 8,446 92,086
Cost of revenues (36,777) (18,819) (7,675) (5,537) (68,808)
Gross profi t 13,654 5,034 1,681 2,909 23,278
Sales and marketing expenses (4,186) (1,592) (371) (1,614) (7,763)
Segment contribution 9,468 3,442 1,310 1,295 15,515
General and administrative expenses (6,422)
Depreciation and amortisation (including
non-cash share-based compensation) (6,758)
Other operating income and expenses (72)
Operating profi t (EBIT) 2,263
Financial income 20
Financial expenses (1,086)
Net income before income taxes 1,197
Income taxes (744)
Net income 453
€ 000s Telecom
munications
Outsourcing Consulting Cloud Consolidated
Group
01/04/ – 30/06/2017
Net revenues 44,511 26,344 10,033 6,272 87,160
Cost of revenues (31,114) (19,734) (8,319) (5,073) (64,240)
Gross profi t 13,397 6,610 1,714 1,199 22,920
Sales and marketing expenses (3,533) (1,553) (307) (1,480) (6,873)
Segment contribution 9,864 5,057 1,407 (281) 16,047
General and administrative expenses (6,412)
Depreciation and amortisation (including
non-cash share-based compensation) (7,963)
Other operating income and expenses 55
Operating profi t (EBIT) 1,727
Financial income 23
Financial expenses (1,166)
Net income before income taxes 584
Income taxes (92)
Net income 492
€ 000s Telecom
munications
Outsourcing Consulting Cloud Consolidated
Group
01/01/ – 30/06/2018
Net revenues 103,833 47,578 19,183 15,571 186,165
Cost of revenues (76,222) (38,975) (15,392) (10,903) (141,492)
Gross profi t 27,611 8,603 3,791 4,668 44,673
Sales and marketing expenses (7,842) (2,602) (463) (2,865) (13,772)
Segment contribution 19,769 6,001 3,328 1,803 30,901
General and administrative expenses (12,393)
Depreciation and amortisation (including
non-cash share-based compensation) (13,595)
Other operating income and expenses (270)
Operating profi t (EBIT) 4,643
Financial income 92
Financial expenses (2,165)
Net income before income taxes 2,570
Income taxes (1,265)
Net income 1,305
€ 000s Telecom
munications
Outsourcing Consulting Cloud Consolidated
Group
01/01/ – 30/06/2017
Net revenues 90,674 53,009 20,733 11,475 175,891
Cost of revenues (62,975) (39,714) (17,335) (9,531) (129,555)
Gross profi t 27,699 13,295 3,398 1,944 46,336
Sales and marketing expenses (6,811) (2,778) (482) (2,774) (12,845)
Segment contribution 20,888 10,517 2,916 (830) 33,491
General and administrative expenses (13,262)
Depreciation and amortisation (including
non-cash share-based compensation) (15,843)
Other operating income and expenses (29)
Operating profi t (EBIT) 4,357
Financial income 70
Financial expenses (2,350)
Net loss before income taxes 2,077
Income taxes (950)
Net income 1,127

6 CASH FLOW FROM FINANCING ACTIVITIES

Financial liabilities developed as follows:

€ 000s 31 Dec. 2017 Cash-eff ective changes Non-cash-eff ective changes 30 June 2018
Reclassifi
cations
Fair value
Financial liabilities
Long-term loans 135,130 (130) (100,000) - 35,000
Short-term loans 281 (5,781) 100,000 - 94,500
Lease liabilities 371 (147) - - 224
Assets to secure long-term loans (931) - - 271 (660)
Financial liabilities 134,851 (6,058) - 271 129,064

7 DIVIDENDS PAID

The Annual Shareholders' Meeting of QSC AG held on 12 July 2018 approved the distribution of a dividend of € 0.03 per share with dividend entitlement. The dividend payment of € 3,725,174.61 was distributed by the depositary banks starting on 17 July 2018.

8 LEGAL DISPUTES

Neither QSC AG nor its group companies are involved in any court or arbitration proceedings that could materially impact on their economic position.

9 TRANSACTIONS WITH RELATED PARTIES

In the fi rst six months of the 2018 fi nancial year, QSC maintained business relationships with companies whose shareholders include members of the Company's management and its Supervisory Board. Persons and companies count as related parties pursuant to IAS 24 when one party has the possibility of exercising control or signifi cant infl uence over the other party. All contracts with these companies require approval by the Supervisory Board and are agreed on customary market terms.

€ 000s Net revenues Expenses Payments
received
Payments
made
01/01/ – 30/06/2018
IN-telegence GmbH 95 57 120 67
Teleport Köln GmbH 6 1 9 1
QS Communication Verwaltungs
Service GmbH - 94 - 108
01/01/ – 30/06/2017
IN-telegence GmbH 127 47 188 56
Teleport Köln GmbH 7 1 10 1
QS Communication Verwaltungs
Service GmbH - 81 - 111
€ 000s Receivables Payables
30 June 2018
IN-telegence GmbH 31 12
Teleport Köln GmbH 1 -
QS Communication Verwaltungs Service GmbH - 16
31 December 2017
IN-telegence GmbH 38 12
Teleport Köln GmbH 3 -
QS Communication Verwaltungs Service GmbH - 12

IN-telegence GmbH is a provider of value added services in the telecommunications industry and mainly draws on network services from QSC. QSC in turn also draws on value added services from IN-telegence GmbH. Teleport Köln GmbH supports QSC in installing end customer connections and also draws on QSC's telecommunications services. QS Communication Verwaltungs Service GmbH advises QSC in the development of concepts and software for cloudbased services.

10 MANAGEMENT BOARD

The following table presents individualised information about the number of shares and convertible bonds held by members of the Management Board:

Shares Conversion rights
30/06/2018
30/06/2017
30/06/2018 30/06/2017
Jürgen Hermann 500,000 400,000 350,000 350,000
Stefan A. Baustert 40,000 40,000 200,000 200,000
Udo Faulhaber (until 31 December 2017) 1
-
100,000 150,000 150,000
Felix Höger (until 31 December 2017) 1
-
150,000 150,000 150,000

1 Holdings at the time of retirement from the Management Board.

11 SUPERVISORY BOARD

The following table presents individualised information about the number of shares and convertible bonds held by members of the Supervisory Board:

-

Shares Conversion rights
30/06/2018 30/06/2017 30/06/2017
Dr. Bernd Schlobohm, Chairman 15,519,910 15,519,910 132,000 132,000
Dr. Frank Zurlino, Deputy Chairman 10,000 10,000 - -
Gerd Eickers 15,577,484 15,577,484 - -
Ina Schlie - - - -
Anne-Dore Ahlers 1 - - 2,700 2,700
Cora Hödl 1 - - 4,100 4,100

1 Employee representative.

12 EVENTS AFTER THE REPORTING PERIOD

No events requiring report here have occurred after the reporting period.

Cologne, August 2018

QSC AG The Management Board

Jürgen Hermann Stefan A. Baustert

Chief Executive Off icer Chief Financial Off icer

STATEMENT OF RESPONSIBILITY

To the best of our knowledge, and in accordance with the applicable reporting principles for interim fi nancial reporting, the Condensed Interim Consolidated Financial Statements give a true and fair view of the assets, liabilities, fi nancial position and profi t or loss of the Group, and the Interim Consolidated Management Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group for the remaining months of the fi nancial year.

Cologne, August 2018

QSC AG The Management Board

Jürgen Hermann Stefan A. Baustert Chief Executive Off icer Chief Financial Off icer

Quarterly Statement 12 November 2018

CONTACT

QSC AG

Arne Thull Head of Investor Relations Mathias-Brüggen-Strasse 55 50829 Cologne T +49 221 669 – 8724 F +49 221 669 – 8009 [email protected] www.qsc.de

Editorial Responsibility QSC AG, Cologne

Design sitzgruppe, Düsseldorf

Photography Marcus Pietrek, Düsseldorf

This translation is provided as a convenience only. Please note that the German-language original of this Half-Year Report is defi nitive.

For further information: www.qsc.de

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