QSC AG

Quarterly Report • Nov 12, 2018

QUARTERLY STATEMENT 1 January to 30 September 2018

KEY DATA

	01/07/ – 30/09/	01/07/ – 30/09/	01/01/ – 30/09/	01/01/ – 30/09/
€ million 2015	2018	2017	2018	2017
Revenues	90.2	88.9	276.4	264.8
EBITDA	9.1	9.1	27.3	29.3
Depreciation and amortisation 1	6.8	7.0	20.4	22.8
EBIT	2.3	2.2	7.0	6.5
Net income	0.3	1.5	1.6	2.6
Earnings per share 2 (in €)	0.00	0.01	0.01	0.02
Free cash fl ow	3.9	2.3	6.7	8.7
Capital expenditure (capex)	4.6	4.2	12.5	14.0
Capex ratio 3 (in %)	5.1	4.7	4.5	5.3
Liquidity			58.6 4	61.9 5
Shareholders' equity			88.2 4	89.5 5
Long-term liabilities			4 46.1	5 147.9
Short-term liabilities			150.2 4	59.6 5
Balance sheet total			284.4 4	297.1 5
Equity ratio (in %)			4 31.0	5 30.1
Xetra closing price as of 30 September (in €)			1.60	1.86
Number of shares as of 30 September	124,172,487	124,172,487
Market capitalisation as of 30 September	198.7	231.0
Number of employees as of 30 September			1,293	1,355

Including non-cash share-based compensation.

Basic and diluted.

Ratio of capital expenditure to revenues.

⁴ As of 30 September 2018.

As of 31 December 2017.

QSC INCREASES REVENUES AND RAISES REVENUE FORECAST

Nine-month revenues up 4% to € 276.4 million. QSC can report year-on-year revenue growth, and that for the third consecutive quarter in the current year. Revenues for the third quarter of 2018 amounted to € 90.2 million, as against € 88.9 million in the equivalent period in the previous year. Nine-month revenues totalled € 276.4 million, compared with € 264.8 million in the previous year.

Ongoing dynamic growth in Cloud business. In percentage terms, QSC generated its highest revenue growth in the fi rst nine months of 2018 in its Cloud segment, with its two core areas of activity, Cloud Services and Internet of Things (IoT). In the year to date, revenues in this segment have risen by 31% to € 25.5 million.

New opportunities arising from interaction of IoT and SAP expertise. In September, QSC's IoT subsidiary Q-loud was the fi rst company in Germany to successfully use the new SAP Leonardo environment to qualify an end-to-end IoT solution. QSC's SAP-based Energy Management Cockpit provides companies with real-time visibility for their energy consumption across several locations.

TC business driven by voice termination. In the current fi nancial year, the Telecommunications (TC) segment has benefi ted in particular from high demand from resellers in the international voice termination business. Nine-month TC revenues rose to € 151.9 million, up from € 137.1 million in the previous year's period.

QSC expects year-on-year revenue growth in 2018. Given its positive business performance, QSC now expects to generate full-year revenues of at least € 360 million in 2018 rather than, as previously communicated, "at least at the upper end of the € 345 million to € 355 million range". The Company therefore expects to exceed the previous year's revenues of € 357.9 million. QSC still plans to generate EBITDA of between € 35 million and € 40 million and free cash fl ow of more than € 10 million.

"QSC is steering a growth course in 2018. We are particularly benefi ting from great dynamism in our Cloud business and stronger demand for TC services. We therefore now expect signifi cantly higher revenues than originally budgeted at the beginning of the year."

Jürgen Hermann, Chief Executive Off icer

"The work on restructuring our organisation is paying off . QSC now has leaner structures and has maintained strict cost discipline. These measures have stabilised our earnings and fi nancial strength."

Stefan A. Baustert, Chief Financial Off icer

SUMMARY OF THE FIRST 9 MONTHS OF 2018

Business Performance

QSC increases revenues and raises revenue forecast. QSC can report year-on-year revenue growth, and that for the third consecutive quarter in the current year. In the third quarter of 2018, the Company generated revenues of € 90.2 million, as against € 88.9 million in the equivalent period in the previous year. Nine-month revenues grew by 4% to € 276.4 million. Given its positive business performance, QSC now expects to generate full-year revenues of at least € 360 mil lion in 2018, in contrast to its previous forecast that revenues would reach "at least the upper end of the € 345 million to € 355 million range". It therefore expects its revenues to exceed the previous year's fi gure of € 357.9 million.

(€ million)

Ongoing dynamic growth in Cloud segment. Cloud revenues surged by 31% year on year, or € 6.0 million, to € 25.5 million in the fi rst nine months of 2018. The segment contribution improved from € -0.4 million in the previous year's period to € 4.1 million, thus underlining the scalability of the business model.

This dynamic growth was driven above all by QSC marketing products from its own Pure Enterprise Cloud. Here, new customers are opting for several or all components off ered within this all-round cloud solution. Alongside that, QSC is supporting existing customers in migrating their IT solutions from traditional on-premise environments to the cloud.

Cloud revenues

(€ million)

IoT applications form the second pillar of the Cloud segment, with all activities in this area pooled at Q-loud. This subsidiary of QSC has stepped up its sales and development work in the current fi nancial year and has also drawn on the expertise of other business units. In September 2018, for example, Q-loud was the fi rst company in Germany to succeed in using the new SAP Leonardo environment to qualify an end-to-end IoT solution. QSC's SAP-based

Energy Management Cockpit provides companies with real-time visibility for their energy consumption across several locations. Energy-intensive companies in particular currently face the challenge of recording their energy consumption data in order to meet the requirements of the ISO 50001 energy eff iciency norm. This is creating an attractive market for Q-loud.

Outsourcing business aff ected by cloud migration. Outsourcing revenues came to € 69.9 million in the fi rst nine months of the current year, as against € 77.9 million in the previous year's period. This reduction is due to the ongoing migration of existing customers to the cloud and to changes in the customer base. To counter this trend, Outsourcing is intensifying its sales activities to attract SME customers interested in outsourcing their IT.

Outsourcing revenues

The decline in revenues did not fail to leave its mark on the segment contribution. This latter key figure fell to € 8.9 million in the first nine months of the current year, compared with € 15.1 million in the previous year's period. In the meantime, the restructuring of the Outsourcing business is continuing apace. Here, QSC is adjusting existing structures to the new requirements of the cloud age and to changes in its customer base.

Consulting demonstrates margin strength. The Consulting segment generated revenues of € 29.0 million in the fi rst nine months of 2018, compared with € 30.3 million in the previous year's period. Over the same period, it increased its segment contribution from € 4.0 million to € 4.8 million. This led the segment margin to rise by 4 percentage points year on year to 17%. The strength of the margin in the personnel-intensive Consulting business is due in particular to the ongoing eff orts being made to optimise capacity utilisation among existing employees. At the same time, given the noticeable shortage of specialists the Company is pressing ahead with training in-house experts for its S/4HANA consulting business, which has the potential to generate particularly high growth.

Consulting revenues

TC business driven by voice termination. TC revenues rose to € 151.9 million in the fi rst nine months of 2018, up from € 137.1 million in the previous year's period. This growth was predominantly due to the international termination business with resellers. A favourable market constellation and exceptionally eff icient cost structures in QSC's own next generation network (NGN) made it possible to generate signifi cantly higher revenues, particularly in the fi rst half of 2018. The corporate customer business also developed positively, with QSC continuing to benefi t here from its comprehensive All-IP and networking expertise.

The segment contribution for the year to date amounted to € 28.7 million in 2018, as against € 30.7 million in the previous year's period. This reduction was due to the higher share of revenues in the termination business, traditionally an area with lower margins.

Telecommunications revenues

(€ million)

Spin-off of TC business approved by Annual General Meeting. The Annual General Meeting held on 12 July 2018 approved the spin-off the TC business to a standalone company, QSC's wholly-owned subsidiary Plusnet. The corresponding entry in the Commercial Register was made on 31 August 2018. As various companies have expressed interest in acquiring Plusnet, on 18 September 2018 the Management Board decided, with approval by the Supervisory Board, to initiate talks with suitable interested parties concerning this strategic option. Any sale of a majority stake or all of Plusnet would have to be executed on very attractive terms. All other strategic options remain on the table, including QSC continuing to develop the business independently or entering into cooperations.

Earnings Performance

Higher cost of revenues. QSC's largest cost item, cost of revenues, grew to € 208.7 million in the fi rst nine months of 2018, up from € 196.2 million in the previous year's period. This increase refl ects the greater weighting of TC revenues with resellers, which involve preliminary services procured from other network operators. At € 67.6 million, gross profi t therefore fell slightly short of the previous year's fi gure of € 68.6 million. Sales and marketing expenses rose by € 2.0 million to € 21.1 million in the fi rst nine months of 2018, while general and administrative expenses decreased by € 0.7 million to € 19.4 million.

EBITDA totalled € 27.3 million in the fi rst nine months of 2018, compared with € 29.3 million in the previous year's period. At € 9.1 million, third-quarter EBITDA was at the same level as in the previous year.

EBIT rises to € 7.0 million. Depreciation and amortisation decreased further in the fi rst nine months of 2018, falling from € 22.8 million in the previous year's period to € 20.4 million. In view of this, operating earnings (EBIT) rose to € 7.0 million, as against € 6.5 million in the fi rst nine months of 2017. Signifi cantly higher income taxes meant that this increase was not refl ected in consolidated net income, which came to € 1.6 million in the fi rst nine months of 2018, compared with € 2.6 million in the previous year.

Financial and Net Asset Position

Free cash fl ow develops in line with expectations. The free cash fl ow for the fi rst nine months of the current fi nancial year totalled € 6.7 million, as against € 8.7 million in the previous year, and was thus consistent with expectations. Year on year, the free cash fl ow for the third quarter of 2018 rose to € 3.9 million, up from € 2.3 million in the equivalent period in the previous year. QSC calculates this key management fi gure as the change in net debt before acquisitions and distributions. The table below shows the relevant parameters at the two balance sheet dates on 30 September 2018 and 31 December 2017.

€ million	30/09/2018	31/12/2017
Liquidity	58.6	61.9
Long-term other fi nancial liabilities	(35.0)	(135.2)
Short-term other fi nancial liabilities	(95.5)	(1.6)
Interest-bearing fi nancial liabilities	(130.5)	(136.8)
Net debt	(71.9)	(74.9)

Liquidity fell by € 3.3 million to € 58.6 million as of 30 September 2018. Over the same period, QSC reduced its interest-bearing fi nancial liabilities by € 6.3 million to € 130.5 million. Within this item, the tranches of the promissory note bond due to mature in the second quarter of 2019 were reclassifi ed from long-term to short-term other fi nancial liabilities.

As a result of these factors, net debt fell by € 3.0 million to € -71.9 million as of 30 September 2018. The free cash fl ow presents the fi nancial strength of the operating business. To account for this, QSC adjusts this key fi gure to eliminate outgoing payments for acquisitions and distributions. The distribution of a dividend of € 0.03 per share after the Annual General Meeting in July 2018 led to an outflow of € 3.7 million. This adjustment resulted in a free cash flow of € 6.7 million for the fi rst nine months of 2018.

Capital expenditure mainly for customers and technology. Capital expenditure totalled € 12.5 mil lion in the fi rst nine months of 2018, compared with € 14.0 million in the previous year's period. Of this total, 47% was customer-related, while 39% was channelled into technology. QSC inves ted the remaining 14% in other items of property, plant and equipment and other intangible assets.

Depreciation reduces value of property, plant and equipment. Due above all to depreciation and amortisation, the long-term assets recognised in the consolidated balance sheet decreased from € 174.9 million at the balance sheet date at the end of 2017 to € 167.0 million as of 30 September 2018. Short-term assets fell slightly to € 117.5 million, as against € 122.2 million as of 31 December 2017.

Equity ratio rises to 31%. Shareholders' equity amounted to € 88.2 million as of 30 September 2018, compared with € 89.5 million as of 31 December 2017. It should be noted that QSC paid a dividend of € 0.03 per share in the third quarter of 2018 and charged the distribution, amounting to a total of € 3.7 million, directly to equity. At 31%, the equity ratio as of 30 September 2018 was nevertheless 1 percentage point higher than at the end of 2017. Long-term liabilities fell to € 46.1 million as of 30 September 2018, as against € 147.9 million at the end of 2017. This reduction was due to the reclassification of promissory note bond tranches recognised under other fi nancial liabilities and due to mature in May 2019. Conversely, short-term liabilities rose to € 150.2 million, up from € 59.6 million as of 31 December 2017. QSC held successful negotiations with the relevant lenders in the fi rst half of 2018 already and agreed to increase its syndicated loan facility from the amount of € 70 million originally committed in 2016 to its current total of € 100 million. This way, QSC acted early to secure the repayment of the promissory note bond tranches due to mature next year.

Outlook

QSC expects year-on-year revenue growth in 2018. Given its positive business performance in the fi rst nine months of 2018, QSC now expects to generate full-year revenues of at least € 360 million in 2018 and thus to exceed the previous year's fi gure of € 357.9 million. The Company had previously forecast revenues at least at the upper end of the € 345 million to € 355 million range communicated in March 2018. QSC still expects to generate EBITDA of € 35 mil lion to € 40 million and a free cash fl ow of more than € 10 million.

Further Information

About this quarterly statement. This document should be read in conjunction with the 2017 Annual Report, which can be found at www.qsc.de/en/investor-relations/ir-publications/. The QI/2018 quarterly statement and half-year report also available there provide further information on the course of business in the fi rst three and fi rst six months of the current fi nancial year respectively. Unless they are historic facts, all disclosures in this report constitute forwardlooking statements. These are based on current expectations and forecasts concerning future events and may therefore change over time.

About the Company. 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-certified 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.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Income (unaudited)

	01/07/ – 30/09/ 2018	01/07/ – 30/09/ 2017	01/01/ – 30/09/ 2018	01/01/ – 30/09/ 2017
Net revenues	90,198	88,925	276,363	264,816
Cost of revenues	(67,222)	(66,683)	(208,714)	(196,238)
Gross profi t	22,976	22,242	67,649	68,578
Sales and marketing expenses	(7,357)	(6,300)	(21,129)	(19,145)
General and administrative expenses	(7,000)	(6,849)	(19,393)	(20,111)
Depreciation and amortisation
(including non-cash share-based compensation)	(6,767)	(6,974)	(20,362)	(22,817)
Other operating income	1,048	365	1,628	1,392
Other operating expenses	(589)	(317)	(1,439)	(1,373)
Operating profi t (EBIT)	2,311	2,167	6,954	6,524
Financial income	19	122	111	192
Financial expenses	(1,132)	(1,069)	(3,297)	(3,419)
Net income before income taxes	1,198	1,220	3,768	3,297
Income taxes	(863)	286	(2,128)	(664)
Net income	335	1,506	1,640	2,633
Attribution of net income
Owners of the parent company	392	1,565	1,824	2,808
Non-controlling interests	(57)	(59)	(184)	(175)
Earnings per share (basic) in €	0.00	0.01	0,01	0.02
Earnings per share (diluted) in €	0.00	0.01	0,01	0.02

Consolidated Balance Sheet

30/09/2018	31/12/2017
(unaudited)	(audited)
52,742	57,481
22,496	23,528
55,568	55,568
23,480	25,349
1,851	2,461
3,497	2,549
146	156
7,184	7,806
166,964	174,898
51,218	52,278
5,916	6,809
534	649
1,198	569
58,596	61,881
117,462	122,186
284,426	297,084

	30/09/2018 (unaudited)	31/12/2017 (audited)
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' equity
Issued capital	124,172	124,172
Capital surplus	144,077	143,787
Other capital reserves	(1,840)	(2,281)
Accumulated defi cit	(177,513)	(175,612)
Equity attributable to owners of the parent company	88,896	90,066
Non-controlling interests	(722)	(538)
Shareholders' equity	88,174	89,528
Liabilities
Long-term liabilities
Other fi nancial liabilities	35,037	135,244
Accrued pensions	5,610	5,924
Other provisions	3,033	3,031
Trade payables and other liabilities	2,123	3,357
Deferred tax liabilities	287	392
Long-term liabilities	46,090	147,948
Short-term liabilities
Trade payables and other liabilities	48,223	46,896
Other fi nancial liabilities	95,486	1,577
Other provisions	2,363	7,388
Accrued taxes	2,263	1,669
Deferred income	1,827	2,078
Short-term liabilities	150,162	59,608
Liabilities	196,252	207,556
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES	284,426	297,084

Consolidated Statement of Cash Flows (unaudited)

	01/01/ – 30/09/	01/01/ – 30/09/
	2018	2017
Cash fl ow from operating activities Net income before income taxes	3,768	3,297
Depreciation and amortisation of long-term assets	20,072	22,438
Other non-cash income and expenses	753	434
Gains (losses) from disposal of long term-assets	(26)	15
Income tax paid	(1,641)	(4,048)
Income tax received	10	4,088
Interest received	85	837
Net fi nancial expenses	3,186	3,227
Changes in provisions	(6,025)	(3,476)
Changes in trade receivables	1,207	(2,562)
Changes in trade payables	3,330	4,173
Changes in other assets and liabilities	(1,770)	278
Cash fl ow from operating activities	22,949	28,701
Cash fl ow from investing activities
Purchase of intangible assets	(5,794)	(4,320)
Purchase of property, plant and equipment	(7,545)	(11,661)
Proceeds from sale of property, plant and equipment	92	32
Proceeds from sale of a subsidiary,
less liquid funds thereby disposed of	-	(430)
Cash fl ow from investing activities	(13,247)	(16,379)
Cash fl ow from fi nancing activities
Dividends paid	(3,725)	(3,725)
Repayment (issuance) of convertible bonds	(1)	5
Repayment of loans	(5,912)	(12,751)
Interest paid	(3,129)	(4,398)
Repayment of liabilities under fi nancing
and fi nance lease arrangements	(220)	(1,270)
Cash fl ow from fi nancing activities	(12,987)	(22,139)
Change in cash and cash equivalents	(3,285)	(9,817)
Cash and cash equivalents as of 1 January	61,881	67,781
Cash and cash equivalents as of 30 September	58,596	57,964

Segment Reporting (unaudited)

	Telecom munications	Outsourcing	Consulting	Cloud	Consolidated Group
01/07/ – 30/09/2018
Net revenues	48,085	22,367	9,846	9,900	90,198
Cost of revenues	(35,512)	(18,012)	(7,932)	(5,76)	(67,222)
Gross profi t	12,573	4,355	1,914	4,134	22,976
Sales and marketing expenses	(3,645)	(1,497)	(405)	(1,810)	(7,357)
Segment contribution	8,928	2,858	1,509	2,324	15,619
General and administrative expenses					(7,000)
Depreciation and amortisation (including
non-cash share-based compensation)					(6,767)
Other operating income and expenses					459
Operating profi t (EBIT)					2,311
Financial income					19
Financial expenses					(1,132)
Net income before income taxes					1,198
Income taxes					(863)
Net income					335

Telecom munications	Outsourcing	Consulting	Cloud	Consolidated Group
46,441	24,928	9,531	8,025	88,925
(33,314)	(18,965)	(8,153)	(6,251)	(66,683)
13,127	5,963	1,378	1,774	22,242
(3,285)	(1,390)	(323)	(1,302)	(6,300)
9,842	4,573	1,055	472	15,942
				(6,849)
				(6,974)
				48
				2,167
				122
				(1,069)
				1,220
				286
				1,506

Segment Reporting (unaudited)

	Telecom munications	Outsourcing	Consulting	Cloud	Consolidated Group
01/01/ – 30/09/2018
Net revenues	151,918	69,945	29,029	25,471	276,363
Cost of revenues	(111,734)	(56,987)	(23,324)	(16,669)	(208,714)
Gross profi t	40,184	12,958	5,705	8,802	67,649
Sales and marketing expenses	(11,487)	(4,099)	(868)	(4,675)	(21,129)
Segment contribution	28,697	8,859	4,837	4,127	46,520
General and administrative expenses					(19,393)
Depreciation and amortisation (including
non-cash share-based compensation)					(20,362)
Other operating income and expenses					189
Operating profi t (EBIT)					6,954
Financial income					111
Financial expenses					(3,297)
Net income before income taxes					3,768
Income taxes					(2,128)
Net income					1,640

Telecom munications	Outsourcing	Consulting	Cloud	Consolidated Group
137,115	77,937	30,264	19,500	264,816
(96,289)	(58,679)	(25,488)	(15,782)	(196,238)
40,826	19,258	4,776	3,718	68,578
(10,096)	(4,168)	(805)	(4,076)	(19,145)
30,730	15,090	3,971	(358)	49,433
				(20,111)
				(22,817)
				19
				6,524
				192
				(3,419)
				3,297
				(664)
				2,633

CALENDAR

2018 Annual Report 29 March 2019

Quarterly Figures 13 May 2019 5 August 2019 11 November 2019

Annual General Meeting 29 May 2019

CONTACT

QSC AG

Arne Thull Head of Investor Relations Mathias-Brüggen-Strasse 55 50829 Cologne, Germany T +49 221 669 – 8724 F +49 221 669 – 8009 invest@qsc.de www.qsc.de