GK Software SE — Interim / Quarterly Report 2018

Nov 26, 2018

January to September 2018

Interim Statement

Summary of Consolidated Results

				Change
		30.9.2018	30.9.2017	(2017/2018)
	EUR K	74,884	65,927
Sales				13.6 %
Operating performance	EUR K	74,868	65,927	13.6 %
Total operating revenue	EUR K	77,211	69,055	11.8 %
EBIT	EUR K	304	4,107	- (92.6) %
EBIT margin (on sales)	%	0.4	6.2
EBIT margin (on total operating revenue)	%	0.4	5.9	-
EBITDA	EUR K	3,833	6,728	(43.0) %
EBT	EUR K	(745)	3,752
Net profit / loss for the period	EUR K	(1,107)	2,292	(148.3) %
Earnings per share (weighted)	EUR	(0.54)	1.21	-
Earnings per share (diluted)	EUR	-	1.16	-
Equity ratio	%	35.5	42.5	-
Net debt	EUR K	3,938	1,799	118.9 %
Employees		1,139	975	16.8 %

9M 2018 Turnover rose by 13.6 percent, EBITDA by EUR 3.83 million

Dear shareholders,

We are delighted to present you with GK Software's quarterly report for the first nine months of the 2018 financial year. We are able to report that we have been continuing the growth process of the last few years without any interruption. The Group's turnover once again rose significantly in comparison with the previous year and reached a figure of EUR 74,88 million (9M 2017: EUR 65.93 million). The figure was therefore 13.6 percent higher than that recorded for the same period in the previous year. In addition, the total operating revenue rose to EUR 77.21 million and exceeded the previous year's figure by 11.8 percent. The Group's EBITDA reached a figure of EUR 3,83 million during the first nine months of the year (9M 2017: EUR 6.73 million).

What is enormously significant is that Forrester Research has singled out OmniPOS as the world's leading solution. The "Forrester Wave: Point of Service, Q3 2018" report, which is very important for the whole sector, particularly emphasised the product quality, the architecture and the cloud-usability as well as the convincing product strategy and vision of the solution. This assessment further strengthens our outstanding position in this internationally competitive market. This year's edition of the RBR Study on the global POS market confirms that this assessment is shared in our market too. It reveals a market share of about 13 percent for GK Software in the field of newly installed POS systems at major retailers between mid-2017 and mid-2018 in the traditional core markets of Western and Eastern Europe and a market share of 10 percent in the MEA region (Middle East & Africa). Measured in terms of the total number of systems that have been installed, the Company has now moved up to position 2 in Western Europe and is the leading player when it comes to new installations. We assume that we will be able to continue improving our market shares with the rollout of further major projects in future and become much more visible in other regions too.

We are continuing to extend our leading position by our efforts in our product development work. In addition to making artificial intelligence usable in the retail sector, we are focusing on expanding the ability of our range of solutions to be fully operated in a cloud. By designing and starting to realise a product that will prevent fraud, we are supplementing our portfolio of integrated scenarios by making use of artificial intelligence in the personalisation and automated price calculation (dynamic pricing) fields of application. We are currently continuing to extend the mobile consumer solutions developed by valuephone GmbH, the company that was taken over this year, in the direction of achieving a "frictionless store" - i.e. all the processes from entering the store to scanning the goods and even the payment transactions are fully mapped on a smartphone. We have also paid significant attention to developing solution options for the petrol station and catering sectors to ensure that we can tap into more customer business areas. We are expecting the first productive use of these new solutions as early as next year.

The successful introduction of the mobile customer solutions from valuephone GmbH was a pleasing development during the first nine months of the year. This solution was introduced at several new customers in the USA and at one existing customer in South Africa during the course of this year. Overall, we were able to attract eight new customers to our solutions. Then there have been

three projects with existing customers, two of which have purchased additional solutions from our portfolio (MCA and OpenScale) and one is switching to OmniPOS. It is particularly significant that four of the new customers come from the USA. Two of them are active in the food retail sector and are among the top 20 in the USA in this field. These customers have provided impressive evidence this year that we are in a position to successfully establish our presence in the world's largest retail market. The other customers all come from different countries, like Italy, Norway, Egypt and even Australia for the first time. They demonstrate that our internationalisation strategy is continuing to function properly and we are gaining momentum here too. This is also backed up by the fact that we have managed to deploy our solutions in other new countries for the first time this year. They include Japan and recently India, two countries that are particularly interesting for us as part of our medium-term strategy for the Asia-Pacific region.

We are expecting further success stories both through our direct sales and also through our partner sales during the fourth quarter and beyond. Our sales pipeline continues to be very well filled and we believe that we are in an excellent position in several ongoing tender procedures.

Market environment

The general situation for the retail sector continues to remain good. The German Retail Federation (HDE: Handelsverband Deutschland), for example, is forecasting that total turnover will reach EUR 523.0 billion in 2018, which corresponds to nominal growth of 2.0 percent. The HDE believes that this will be the case because of the continuing growth in online retailing and the positive mood among retailers. 1 The annual surveys of retailers in relation to their business prospects also support the HDE forecast. According to the latest "e-KIX" survey of retailers in the 1st quarter of 2018, approximately 82 percent of the retailers that were questioned expected their business to remain constant or improve over the coming twelve months. 2 The German government is also expecting an increase in private and state consumption of 1.6 and 1.4 percent respectively.³Alongside this, business prospects continue to be good at an international level too. Turnover is expected to increase in Europe by 2.1 percent 4  in nominal terms; the National Retail Federation is even forecasting an increase in sales of 4.5 percent in North America 5 .

Employees

GK Software currently employs 1,139 members of staff (the figure was 975 on 30 September 2018) and therefore represents an increase of 164 over the number at the end of the comparative period in the previous year. 48 of them were added by the acquisition of prudsys AG, which specialises in artificial intelligence, in November 2017 and 27 by the takeover of valuephone GmbH and incorporation in our Group in June 2018.

4 – https://www.gfk.com/de/insights/press-release/stationaerer-einzelhandel-in-europa-waechst-in-2018/

¹ – https://www.einzelhandel.de/presse/aktuellemeldungen/11145-hde-prognose-handel-2018-mit-zwei-prozent-umsatzplus

² – e-KIX 1st Quarter 2018, p. 3

³ – https://www.bmwi.de/Redaktion/DE/Dossier/wirtschaftliche-entwicklung.html

⁵ – https://www.retaildive.com/news/nrf-raises-2018-retail-sales-forecast/529940/

Segment results

The GK/Retail core business segment is mainly responsible for this growth in turnover; it was possible to increase its sales by 22.7 percent to a figure of EUR 67.05 million in comparison with the previous year. If we examine the make-up of the turnover according to types of work, then even growth was present in all three major types of work in the GK/Retail business segment. If we consider the significant investments in the range of products in this segment, the development of results in this field is extremely satisfactory.

The turnover in the IT Services segment declined by EUR 3.23 million in comparison with the same period in the previous year, which was mainly due to the loss of a large hardware maintenance order; this weighed on the results in this segment accordingly. Turnover in the SQRS segment continued to decline according to plan and fell to a figure of EUR 0.39 million. The decision to stop selling the SQRS solutions in future has not changed.

There was a slight change in the relationship between the types of turnover to each other during the first nine months of the year in comparison with the previous year. The services (52.2 percent) type of work still accounted for the largest proportion. Maintenance accounted for 27.7 percent during the reporting period, while licences and customised development work together generated 21.2 percent. Other turnover (1.3 percent) and the GK Academy (0.5 percent) only made a minor contribution to total turnover.

The exchange of services between the segments is governed by servicing contracts, which are geared towards the normal segment revenues in their outside markets. Supply contracts are used as the basis for administrative services. The actual costs of the administrative services supplied are calculated according to the estimated time required, based on past experience.

Assets and financial situation

The Group's assets and financial situation did not change markedly at the end of the 2017 financial year. However, the current assets declined by 15.9 percent to a figure of EUR 52.01 million; by contrast, non-current assets increased by a similar amount of EUR 9.23 million to a figure of EUR 53,95 million; these changes are partly due to the acquisition of valuephone GmbH in June 2018 and the investments to extend our research and innovation campus at the business site in Schöneck. There were no major changes on the liabilities side.

There were no changes in the Company's opportunities and risks.

Financial forecast and outlook

The Management Board at GK Software is standing by its forecast without making any changes, as expressed in the financial statement for the year 2017 and in the 2018 half-yearly report, assuming that the general economic and political conditions remain as they are.

We are confident that we will be able to maintain our growth in turnover experienced in the past in future years too and we plan to once again increase our turnover compared to 2017 (EUR 90.54 million) by about fifty percent during the three years up to 2020. As far as 2018 is concerned, we

are continuing to assume that we will be able to further increase our turnover in comparison with last year, based on the results that exist and the sales opportunities for the remainder of this financial year. This expectation is based on the sales opportunities that are being processed and on work that has been generated during the past nine months, but could not be entered as turnover; nevertheless, the conditions for this will be available in the fourth quarter. We are standing by the short-term forecast in terms of earnings for the year 2018, but would point out that meeting it will depend on achieving several sales success stories during the current financial year. We are generally maintaining our goal of achieving earnings of approx. 15 percent in our core business and maintaining this level.

We are also maintaining our provisos, as in the past, that expenditure for tapping into new markets, the postponement of fairly large customer projects or a deterioration in the overall economic situation could impair the fulfilment of this goal.

Schöneck, 26 November 2018

The Management Board

Rainer Gläss Chief Executive Officer

André Hergert Chief Financial Officer and Head of Human Resources

Consolidated balance sheet on 30 September 2018

Assets

T.01

	30.9.2018	31.12.2017
EUR K	(not audited)	(audited)
Property, plant and equipment	21,185	14,183
Intangible assets	27,529	25,359
Financial assets	34	33
Active deferred taxes	5,204	5,149
Total non-current assets	53,952	44,724
Goods	663	798
Auxiliary materials and supplies	229	192
Initial payments made	156	54
Trade accounts receivable	19,576	17,711
Trade accounts receivable from ongoing work	6,500	5,129
Income tax claims	1,003	450
Accounts receivable with associated firms	0	0
Other accounts receivable and assets	8,162	7,062
Cash and cash equivalents	15,719	30,478
Total current assets	52,008	61,874
Balance sheet total	105,960	106,598

Liabilities

	30.9.2018	31.12.2017
EUR K	(not audited)	(audited)
Subscribed capital	1,925	1,903
Capital reserves	21,269	20,488
Retained earnings	31	31
Other reserves (OCI from introducing IAS 19 2011, IAS 21)	(1,401)	(704)
Profit brought forward	15,881	11,998
Shortfall for period minorities interests	(1,031)	3,882
Equity attributable to GK Software SE stockholders	36,674	37,598
Equity attributable to noncontrolling interest	994	1,071
Total equity	37,668	38,669
Provisions for pensions	2,001	1,880
Non-current bank liabilities	7,154	8,867
Convertible bond	13,771	13,149
Deferred government grants	873	910
Deferred tax liabilities	4,328	4,851
Total non-current liabilities	28,127	29,657
Current provisions	1,127	1,346
Current bank liabilities	12,503	10,307
Liabilities from trade payables	846	1,835
Initial payments received	779	858
Income tax liabilities	402	488
Other current liabilities	24,508	23,438
Total current liabilities	40,165	38,272
Balance sheet total	105,960	106,598

Consolidated profit and loss statement and other results from 1 January to 30 September 2018

EUR K	9M 2018	9M 2017	2017
Ongoing business operations
Turnover revenues	74,884	65,927	90,452
Change in inventories of finished and unfinished products	- (16)	- -
Own work capitalised
Other operating revenues	2,356	3,128	5,197
Turnover and other revenues	77,224	69,055	95,649
Materials expenditure	(5,970)	(5,758)	(8,530)
Personnel expenditure	(50,068)	(42,044)	(57,809)
Depreciation and amortisation	(3,529)	(2,622)	(3,780)
Other operating expenditure	(17,353)	(14,525)	(20,537)
Total operating expenses	(76,920)	(64,949)	(90,656)
Operating results	304	4,106	4,993
Financial income	113	36
Financial expenditure	(1,161)	(391)	(786)
Financial results	(1,048)	(355)	(653)
Income tax results	(744)	3,751	4,340
Income taxes	(363)	(1,460)	(456)
Consolidated surplus/ shortfall for the period	(1,107)	- 2,291	3,884
of which attributable to noncontrolling interest	(75)
of which attributable to GK Software SE stockholders	(1,032)	2,291	3,882
Other results after income taxes
Items, which will be reclassified in the consolidated profit and loss statement in future under certain conditions
Differences in exchange rates from recalculating for eign business operations	(720)	(476)
Items, which will not be reclassified in the consolidated profit and loss statement in future
Actuarial gains/ losses from defined benefit pension
plans	24	(116)
Overall results	(1,803)	1,699	4,032
of which attributable to noncontrolling interest	(75)	-
of which attributable to GK Software SE stockholders	(1,728)	1,699	4,030
Earnings per share (EUR/ share) from the consolidated surplus/ shortfall - undiluted	(0.54)	1.21
Earnings per share (EUR/ share) from the
consolidated surplus/ shortfall - diluted	0.00	1.15

Consolidated cash flow statement on 30 September 2018

Cash flows from operating business

EUR K	9M 2018	9M 2017
Cash flows from operating business
Surplus/ shortfall for period	(1,107)	2,292
Share option scheme (non-cash expenditure)	257	164
Income taxes affecting results	363	1,460
Interest expenditure affecting results	1,425	391
Interest income/ expenses affecting results	(113)	(36)
Profit/ loss from the sale or disposal of property, plant and equipment	(4)	(5)
Reversals of deferred public sector subsidies	(37)	(31)
Write-downs recognised for receivables	161	-
Write-ups recognised for receivables	(70)	-
Depreciation and amortisation	3,529	2,621
Actuarial gains/ losses	24	(116)
Net foreign currency losses /gains	(1,282)	1,229
Net profits from financial tools assessed at their fair value	321	(753)
Other non-cash revenues and expenditure	(1)	0
Cash flow from operating business	3,466	7,216
Changes in net current assets
Changes in trade accounts receivable and other receivables	(2,945)	(3,510)
Changes in inventories	(4)	(428)
Changes in trade accounts payable and other liabilities	(1,296)	8,255
Changes in initial payments received	(78)	1,025
Changes in provisions	(124)	(70)
Interest paid	(433)	(357)
Income taxes paid	(531)	(923)
Net inflow of funds from operating activities Amount carried forward	(1,945)	11,208

Cash flows from investment and financing activities, loans and cash and cash equivalents

EUR K	9M 2018	9M 2017
Amount carried forward
Net inflow of funds from operating activities	(1,945)	11,208
Cash flow from investment activities
Payments for property, plant and equipment and non-current assets	(9,696)	(5,957)
Proceeds from disposals of fixed assets	4
Investment subsidies used	-
Incoming payments as part of the company acquisition	(4,243)
Disbursement as part of thea company acquisition	-
Interest payments received	92
Disbursed loans	-
Proceeds from the repayment of loans	0
Net cash outflow for investment activities	(13,843)	(5,184)
Cash flow from financing activities
Taking out equity	545
Taking out loans	531	4,564
Repayment instalments for loans of loans	(3,588)	(2,055)
Issue of convertible bond	-
Net inflow (previous year: net outflow) in cash from financing
activities	(2,512)	2,509
Net outflow of cash and cash equivalents	(18,300)	8,533
Cash and cash equivalents at the beginning of the financial year	27,958	2,812
Cash and cash equivalents  at the end of the financial year	9,594	11,387
Impact of changes in exchange rates on cash and cash equivalents	- (64)
Limited available funds

Summary of cash and cash equivalents

T.06

Cash and cash equivalents at the end of the financial year	9,594	11,387
Utilisation of current account credit/ credit card/ exchange rate	(6,125)	(6,333)
Liquid assets	15,719	17,720
EUR K	9M 2018	9M 2017

Financial Calendar

26 April 2019 Annual report as of 31 December 2018

30 May 2019 Interim statement as of 31 March 2019

20 June 2019 Annual shareholders' meeting 2019 in Schöneck/V.

29 August 2019 Interim report as of 30 June 2019

November 2019 Analyst conference in Frankfurt/M.

26 November 2019 Interim statement as of 30 September 2019

Imprint/Notes

Imprint

Publisher:

GK Software SE Waldstraße 7 08261 Schöneck

P: +49 37464 84-0 F: +49 37464 84-15

www.gk-software.com investorrelations@gk-software.com

Chairman of the Supervisory Board:

Dipl.-Volkswirt Uwe Ludwig

Management board:

Dipl.-Ing. Rainer Gläß, CEO Dipl.-Kfm. André Hergert, CFO

Commercial Register Chemnitz HRB 31501

USt.-ID. DE 141 093 347

Photos:

Image archive GK Software SE, Title: samsommer, Unsplash

Contact Investor Relations

GK Software SE Dr. René Schiller Friedrichstr. 204 10117 Berlin

P: +49 37464 84-264 F: +49 37464 84-15

rschiller@gk-software.com

Notes

Note to the statement

This interim statement is the English translation of the original German version. In case of deviations between these two the German version prevails. This interim statement can be downloaded in both languages at https://investor.gk-software.com.

Note regarding the rounding of figures

Due to the commercial rounding of figures and percentages small deviations may occur.

Disclaimer

This interim statement includes statements concerning the future, which are subject to risks and uncertainties. They are estimations of the Board of Management of GK Software SE and reflect their current views with regard to future events. Such expressions concerning forecasts can be recognised with terms such as "expect", "estimate", "intend", "can", "will" and similar terms relating to the Company. Factors, which can have an effect or influence are, for example (without all being included): the development of the retail and IT market, competitive influences including price changes, regulatory measures and risks with the integration of newly acquired companies and participations. Should these or other risks and uncertainty factors take effect or should the assumptions underlying the forecasts prove to be incorrect, the results of GK Software SE could vary from those, which are expressed or implied in these forecasts. The Company assumes no obligation to update such expressions or forecasts.