QSC AG

Earnings Release • Nov 10, 2014

QSC AG

Company Presentation

Results Q3 2014

Cologne, November 10, 2014

AGENDA

• 1. Financial Analysis
• 1. Strategic Outlook
• 1. Questions & Answers

Q3 2014 HAS NOT MET EXPECTATIONS

In € million	Q3 2013	Q3 2014
• Revenues	113.8	106.6
• (1) Cost of revenues	75.9	80.5
• Gross profit	+37.9	+26.1
• (1) Other operating expenses	18.5	17.3
• EBITDA profit	+19.4	+8.8
• Depreciation	13.8	12.7
• EBIT profit	+5.5	-3.9
• Financial results	-0.9	-1.7
• Income taxes	+0.1	-0.6
• Net profit	+4.7	-6.2

³

(1) Excluding depreciation and non-cash share-based remuneration

REASON 1: REVENUES WERE TOO LOW

REVENUE MIX (in € million)

• Sharpest decline in Resellers since Q1 2013
• Steady development in Indirect Sales, but only small impact of new ICT products
• Direct Sales did not profit from large orders and revenue mix was unfavorable (higher percentage of low-margin hardware sales)

REASON 2: COST OF REVENUES DO NOT REFLECT REVENUE DEVELOPMENT

COST OF REVENUES (in € million) 49.4 48.0 9.9 12.9 16.6 19.6 75.9 80.5 Q3/13 Q3/14 Cost of materials Cost of infrastructure Personnel expenses

• Direct Sales in particular has invested in growth and added ICT experts in 2013/2014
• => rise of personnel expenses
• QSC does not benefit anymore from the deferred cost effect

=> rise of costs of infrastructure

THE RESULT: A HUGE DECLINE IN GROSS PROFIT

GROSS PROFIT (in € million) 37.9 26.1 -75.9 -80.5 113.8 106.6 Q3/13 Q3/14 Gross profit Cost of revenues Revenues

• Revenues declined y-o-y by € 7.2 million
• Cost of revenues rose at the same time by € 4.6 million
• Gross profit decreased by € 11.8 million

LOWER GROSS PROFIT WAS PARTLY COMPENSATED BY LOWER SG&A COSTS

• Sales and marketing expenses: lower commissions for sales partners
• General and administrative expenses: positive effect of INFO AG merger

HIGHER COST OF REVENUES STRAINED DIRECT SALES, IN PARTICULAR

•	Indirect Sales
	(EBITDA margin: 23%)
	benefited from high-margin business

with IP-based voice and data products

• Direct Sales (EBITDA margin: 9%)

suffered mainly from 3 developments:

• higher personnel expenses
• large amount of low-margin hardware revenues
• margin squeeze in IT Outsourcing

• Resellers

(EBITDA margin: -11%) still cover 39% of QSC's overall network costs

CONCLUSION: QSC HAS TO GENERATE HIGHER REVENUES TO JUSTIFY EXISTING COST BASE

• In Q2 and Q3 2014, revenues were below expectations
• In 2013, QSC invested in future growth and especially in additional manpower to cope with the planned revenue growth
• After a weak Q2 2014, QSC took the first measures:
• Hiring freeze
• Rebalancing the workload between internal and external experts
• Sales push in Direct Sales

QSC will now step up its efforts to regain customary profitability

AFTER TWO QUARTERS BELOW EXPECTATIONS, QSC HAS TO ADJUST GUIDANCE FOR 2014

QSC now anticipates:

• Revenues of at least € 430 million
• EBITDA of at least € 40 million
• Free cash flow of at least € 6 million or, including a one-off working capital effect, of not more than € -12 million
• Dividend guidance confirmed: at least € 0.10 per share

AGENDA

• 1. Financial Analysis
• 2. Strategic Outlook
• 1. Questions & Answers

AT A GLANCE: MAIN CHALLENGES IN 2014 SO FAR

• Progress in marketing innovations is too slow
• Revenues are too low, especially in two areas
• New ICT products
• Direct Sales
• Margin pressure in several areas
• Legacy TC business
• IT Outsourcing
• These challenges prevented QSC from reaching its ambitious goals

HOW QSC AIMS TO MASTER THE CHALLENGES: 5 KEY TOPICS

Growth	• New sales channels for new ICT products
	• Sales push in Direct Sales
Savings	• Streamlining the organization
	• Action plan to regain profitability
Acquisitions	• Acquisitions to strengthen innovation activities and core business

A SALES PUSH FOR NEW ICT PRODUCTS

• 3 challenges hinder marketing of new ICT products
• Traditional sales channels do not meet expectations
• Addressing SOHOs and Resellers with regard to Cloud products
• Mid-size companies hesitant about entering the Cloud era
• 1 st response: establishment of dedicated sales capacities for new ICT products
• Direct Sales reps
• Telesales
• 2
• 3
• nd response: enhancement of Online marketing and cooperations with large resellers
• rd response: onboarding teams for the Cloud era

SALES PUSH IN DIRECT SALES HAS ALREADY LED TO AN UPSWING IN TCV

• Upswing is driven by existing customers such as BEB Erdgas and Errol: early extension of framework agreement for a further 48 months
• New biz: Dussmann Group has contracted QSC to introduce SAP HCM human resources solution

STREAMLINING THE ORGANIZATION: THE "CLARITY" PROJECT

• In summer 2014, QSC started a program to raise efficiency
• Main topics
• Rebalancing the workload between internal and external experts
• Optimizing the pool of suppliers and the purchasing processes (supplier management)
• Raising the efficiency of internal processes and structures
• QSC will now extend this program and expects visible progress during the course of 2015

NEXT STEP: AN ACTION PLAN TO REGAIN PROFITABILITY

• November/December 2014: comprehensive status quo analysis
• All cost positions are being scrutinized
• Mid-term program to industrialize IT operations
• Analysis of outsourcing opportunities to improve cost structure
• End of January 2015: integration into guidance and presentation

ACQUISITIONS: TWO FOCUS AREAS

• QSC is well financed to acquire 1-2 further companies to
• strengthen core business and to realize economies of scale
• support innovation progress
• Opportunities in core business
• High margins in Indirect Sales underline potential of IP-based TC business
• Strengthening of Consulting business to be competitive for larger projects and to staff these projects with internal capacities
• Opportunities in new business
• QSC is positioned as a full-service ICT provider for the Cloud era
• Start-ups and established players can help to extend the portfolio

SUMMARY: IN THE COMING MONTHS, QSC IS SETTING THE COURSE TO REGAIN ITS STRENGTH

• Course of business in 2014 has been disappointing so far
• QSC made mistakes and learned its lessons
• Comprehensive action taken in the areas of growth and efficiency
• Acquisitions can support and accelerate the change
• There is no doubt concerning the growth opportunities of the Cloud market and of QSC

AGENDA

• 1. Financial Analysis
• 1. Strategic Outlook
• 3. Questions & Answers

CONTACT

QSC AG Arne Thull Head of Investor Relations Mathias-Brüggen-Strasse 55 50829 Cologne

Phone +49-221-669-8724 Fax +49-221-669-8009 E-mail invest@qsc.de Web www.qsc.de

twitter.com/QSCIRde twitter.com/QSCIRen blog.qsc.de xing.com/companies/QSCAG slideshare.net/QSCAG

SAFE HARBOR STATEMENT

This presentation includes forward-looking statements as such term is defined in the U.S. Private Securities Litigation Act of 1995. These forward-looking statements are based on management's current expectations and projections of future events and are subject to risks and uncertainties. Many factors could cause actual results to vary materially from future results expressed or implied by such forward-looking statements, including, but not limited to, changes in the competitive environment, changes in the rate of development and expansion of the technical capabilities of DSL technology, changes in prices of DSL technology and market share of our competitors, changes in the rate of development and expansion of alternative broadband technologies and changes in prices of such alternative broadband technologies, changes in government regulation, legal precedents or court decisions relating, among other things, to line sharing, rent for colocation and unbundled local loops, the pricing and timely availability of leased lines, and other matters that might have an effect on our business, the timely development of value-added services, our ability to maintain and expand current marketing and distribution agreements and enter into new marketing and distribution agreements, our ability to receive additional financing if management planning targets are not met, the timely and complete payment of outstanding receivables from our distribution partners and resellers of QSC services and products, as well as the availability of sufficiently qualified employees.

A complete list of the risks, uncertainties and other factors facing us can be found in our public reports and filings with the U.S. Securities and Exchange Commission.

DISCLAIMER

• This document has been produced by QSC AG (the "Company") and is furnished to you solely for your information and may not be reproduced or redistributed, in whole or in part, to any other person
• No representation or warranty (express or implied) is made as to, and no reliance should be placed on, the fairness, accuracy or completeness of the information contained herein and, accordingly, none of the Company or any of its parent or subsidiary undertakings or any of such person's officers or employees accepts any liability whatsoever arising directly or indirectly from the use of this document
• The information contained in this document does not constitute or form a part of, and should not be construed as, an offer of securities for sale or invitation to subscribe for or purchase any securities and neither this document nor any information contained herein shall form the basis of, or be relied on in connection with, any offer of securities for sale or commitment whatsoever