QPR Software's operating profit doubled in 2016

QPR SOFTWARE PLC'S FINANCIAL STATEMENTS BULLETIN 2016, FEBRUARY 16, 2017 AT 3.00 PM

Summary for the full year 2016

• Net sales EUR 8,634 thousand (2015: 9,436).
• Net sales decreased by 8%. Process mining business increased significantly, but it did not fully compensate sales decline in other businesses.
• Operating profit doubled to EUR 761 thousand (368), operating profit 8.8% of net sales (3.9). Operating profit increased due to siginificantly decreased expenses. Especially personnel costs were lower compared to previous year.
• Comparable operating profit EUR 801 thousand (368).
• Profit before taxes EUR 710 thousand (347).
• Profit for the year EUR 568 thousand (338).
• Earnings per share EUR 0.047 (0.028).
• The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 0.03 be paid to shareholders for the financial year of 2016 (2015: 0.02).

Summary for the fourth quarter 2016

• Net sales EUR 2,315 thousand (2,520).
• Net sales decreased by 8%, mainly due to lower sales of consulting and software licenses in Finland. The international sales increased by 18%.
• O perating profit EUR 252 thousand (78), operating profit 10.9% of net sales (3.1). Operating profit increased due to siginificantly decreased expenses.
• Comparable operating profit EUR 252 thousand (78).
• Profit before taxes EUR 242 thousand (48).
• Profit for October–December EUR 217 thousand (55).
• Earning per share EUR 0.018 (0.005).

Business operations

QPR Software focuses on providing software and professional services to organizations for operational development. Our software and services are used in over 50 countries. The Company offers its customers insight to their business operations through modeling, analysis and performance monitoring. This insight enables customers to streamline operations and to improve and execute their strategies effectively. The Company’s product portfolio has been strongly renewed in recent years. The new software products offer customers innovative and efficient tools to model various dimensions in organizations, to automatically discover any processes based on actual event data and to analyze causes for potential performance problems.

OUTLOOK

Operating environment and market outlook

We estimate the growth of process mining software and related services to accelerate compared to previous year. This software product category is still relatively new, but competition and investments are increasing strongly in this market.

In developed markets, competition is expected to increase for process and enterprise architecture modeling software and performance management services. Whereas in emerging markets, meaningful growth potential for these software products is still expected.

Outlook for 2017

QPR will continue to invest in sales activities for its in-house developed process mining software and the related services. QPR estimates that this business will grow significantly this year.

The tightened competition in the software business for process and enterprise architecture modeling and performance management is expected to have a negative impact on sales in parts of QPR’s reseller channel, especially in developed markets. To offset this negative impact, QPR seeks growth in emerging markets by renewing its reseller partner channel related to these products.

In its home market in Finland, QPR will especially focus to develop and deliver process modeling and performance management products. In operational development consulting we will invest in developing and extending the key customerships.

The Company estimates that its net sales will grow in 2017, but the operating profit will remain slightly lower than previous year due to growth investments. The planned increase in costs is mainly related to accelerating software development and investments in international business.

KEY FIGURES

REPORTING

QPR Software innovates, develops, sells and delivers software and services aimed at operational development in organizations to international markets. QPR Software reports one operating segment: Operational development of organizations. In addition to this, the Company reports revenue from products and services as follows: Software licenses, Software maintenance services, Software rentals, and Consulting. Software rentals and Software maintenance services together form the recurring revenue reported by the Company. Recurring revenue is based on long-term contracts continuing for the time being or for a fixed period of several years. Rental and maintenance charges are typically invoiced annually in advance.

The geographical areas reported are Finland, the rest of Europe (also including Russia and Turkey), and the rest of the world. Net sales are reported according to the customer’s location.

In the half year Jan–June 2016 financial report, the Company renamed a term in order to comply with the European Securities and Markets Authority´s (ESMA) recommendations for alternative key figures, which was effective from July 3, 2016. The previously used term “operating profit excluding non-recurring items” is now known as “comparable operating profit”. Items having an impact on comparable operating profit are, for example, non-recurring items related to streamlining or restructuring business. Comparable operating profit is calculated by eliminating these items from operating profit. Interest-bearing net debt is calculated by deducting cash and cash equivalents from interest-bearing liabilities.

REVIEW BY THE CEO

The business environment still remained challenging and economic growth was weak in most markets, especially in the Company’s largest market area, Europe (including Finland). On the other hand, the demand for process mining, being at the beginning of its life-cycle, increased strongly. We acquired and extended several significant client engagements with big international corporations. Consequently, our net sales for this product area grew significantly during the past year.

Thanks to our patented technology, early market entry, and innovative functionalities, our process mining software QPR ProcessAnalyzer is in excellent position to continue its strong market growth. In May, we received additional intellectual property protection for our process mining technology, when the United States Patent and Trademark Office awarded already the second patent for the technology in question. The latest patent now safeguards the technology behind predicting the probability of future events based on process analysis.

In process and enterprise architecture modeling and performance management software, we will sustain our strong position with solution development. In our home market in Finland, operational development consulting will complement these solutions.

At the end of 2016, we started to increase our investments in product development. During the first part of this year, we will build especially our marketing and delivery resources. We will seek growth in process mining and especially in its international software markets.

Jari Jaakkola Chief Executive Officer

NET SALES

January–December 2016

Net sales for 2016 were EUR 8,634 thousand (9,436), representing a decrease of eight per cent. This was due to lower sales in Finland, where especially consulting net sales declined. Net sales of operational development consulting and technical SAP consulting decreased, but net sales of process mining and analysis consulting increased.

International net sales grew slightly (+2%) due to significantly increased sales in process mining software, although the international reseller sales decreased in process and enterprise architecture modeling and performance management software. However, the new reseller partners had a positive impact on net sales of reselling channel and did reduce the sales decline.

Software license net sales decreased (-8%) due to lower sales in Finland. Vast majority of license net sales were derived from international markets where sales increased.

Software maintenance services (-3%) and software rental net sales (-6%) decreased compared to previous year. This was mainly due to expiration of a few significant long-term contracts, which was not fully compensated by new sales. The share of recurring revenue was 51% (49) of total net sales.

Consulting net sales decreased by 15%, which was especially caused by a significant decline in sales during the first quarter of the year. Net sales from process mining and analysis services grew, but sales from technical SAP consulting and operational development consulting decreased.

As for the Group net sales, 65% (69) were derived fom Finland, 20% (18) from the rest of Europe (including Russia and Turkey) and 15% (13) from the rest of the world.

October–December 2016

Net sales were EUR 2,315 thousand (2,520). Net sales decreased by 8% compared to corresponding period in the previous year. This was due to lower sales in Finland, where both consulting and software sales decreased. International net sales grew by 18%.

Software license net sales decreased by 16% compared to October–December in the previous year due to the decline in net sales of enterprise architecture and process modeling software in Finland. Net sales of international software licenses increased.

Software maintenance services (-3%) and software rental net sales (-5%) decreased compared to previous year. This was mainly due to expiration of a few significant long-term contracts, which was not fully compensated by new sales. The share of recurring revenue was 49% (47) of total net sales.

Consulting net sales decreased by 10%, which was mainly caused by operational development consulting and technical SAP consulting.

As for the Group net sales, 64% (72) were derived fom Finland, 21% (18) from the rest of Europe (including Russia and Turkey) and 15% (10) from the rest of the world.

FINANCIAL PERFORMANCE

January–December 2016

The Group operating profit improved significantly in 2016 from the previous year and was EUR 761 thousand (368), representing 8.8% of net sales (3.9). Comparable operating profit was EUR 801 thousand (368). The items that had an impact on comparable operating profit were related to the streamlining of operations implemented in early 2016, and mainly included personnel expenses.

Costs decreased significantly and especially personnel costs were lower than in the previous year. Further investments were made in the Company’s new software products.

The Group’s fixed costs were EUR 7,472 thosand (8,510) in the reporting period and they decreased by 12% compared to year-on-year. Personnel costs represented 72% (76) of fixed costs, equaling to EUR 5,362 thousand (6,477).

Profit before taxes was EUR 710 thousand (347) and profit for the period was EUR 568 thousand (338). Taxes recorded for the period were EUR 142 thousand (9). Earnings per share (fully diluted) were EUR 0.047 (0.028).

October–December 2016

The Group operating profit was EUR 252 thousand (78), representing 10.9% of net sales (3.1). Operating profit increased from the previous year due to lower costs. Especially personnel costs decreased significantly.

The Group’s fixed costs were EUR 1,965 thousand (2,286) in the reporting period and they decreased by 14% compared to year-on-year. Personnel costs represented 68% (76) of fixed costs, equaling to EUR 1,337 thousand (1,734).

Profit before taxes was EUR 242 thousand (48) and profit for the period was EUR 217 thousand (55). Earnings per share (fully diluted) were EUR 0.018 (0.005).

FINANCE AND INVESTMENTS

Cash flow from operating activities in 2016 was EUR 1,419 thousand (406), and in the fourth quarter EUR 199 thousand (-379). The significant growth of cash flow resulted mainly from improved profit and change in invoicing interval. Change in invoicing interval also caused a significant amount of value added taxes to be paid already at the end of 2015, which had a positive impact on cash flow. Cash and cash equivalents at the end of the financial year were EUR 565 thousand (585).

Investments during the financial year were EUR 698 thousand (1,148), and consisted mainly of product development investments.

Net financial expenses were EUR 51 thousand (21). Financial items included foreign exchange currency losses (net) of EUR 40 thousand (20). In October–December net financial expenses were EUR 10 thousand (30), and included foreign exchange currency losses (net) of EUR 10 thousand (29).

At the end of the financial year, the Company did not have any interest-bearing liabilities. The gearing ratio was -17% (-3). Current liabilities include deferred revenues in total of EUR 852 thousand (1,209). Annualized return on investment was 25% (12) in the financial year, and 30% (11) in October–December.

At the end of the financial year, equity ratio was 46% (43) and the consolidated shareholders’ equity was EUR 3,252 thousand (2,914). Annualized return on equity was 18% (11) in January–December and 28% (8) in October–December.

The Annual General Meeting on March 22, 2016 authorized the Board of Directors to decide on issuing a maximum of 4,000,000 new shares, to decide on conveyance of a maximum of 700,000 own shares, and to decide on acquiring a maximum of 250,000 own shares. The authorizations are in force until the next Annual General Meeting.

PRODUCT DEVELOPMENT

QPR develops software and consulting service products to be used by its customers. Software product development costs in the reporting period January–December were approximately 94% (91) of all product development costs. The Company published new versions of all of its software products in the reporting period. By developing its consulting service products, the Company aims to grow its local business in Finland, and to accelerate its international software sales by offering complementary service concepts and solutions to its software reseller partners.

In the reporting period, product development expenses were EUR 1,818 thousand (1,821), representing 21% of net sales (19). Product development expenses do not include amortization of capitalized product development expenses. Product development expenses were capitalized for a total amount of EUR 621 thousand (782). The amortization of capitalized product development expenses in the quarter was EUR 569 thousand (462).

In October-December, product development expenses were EUR 568 thousand (466), representing 24.5% of net sales (18). Product development expenses do not include amortization of capitalized product development expenses. Product development expenses were capitalized for a total amount of EUR 160 thousand (174). The amortization of capitalized product development expenses in the reporting period was EUR 157 thousand (116).

PERSONNEL

At the end of the reporting period, the Group employed a total of 63 persons (83). Average number of personnel in 2016 was 71 (86).

For incentive purposes, the Company has a bonus program that covers all employees. Remuneration of the top management consists of salary, fringe benefits and a possible annual bonus based mainly on net sales development. In 2016, the maximum annual bonus of executive management team, including the CEO, is 30% of the annual base salary. A bonus totaling EUR 10 thousand (8) is paid to the executive management team for 2016. More information on incentive plans can be found in the Annual Report 2015 ( http://cdn.qpr.com/sites/default/files/QPR_So...2015_1.pdf ).

QPR SOFTWARE’S STRATEGY FOR 2017–2019

The Board of Directors has approved an updated strategy for QPR Software.

QPR Software innovates, develops and sells in international markets software aimed at analyzing, monitoring and modeling operations in organizations. Furthermore, the Company offers customers a variety of services for operational development planning and execution.

The Company focuses its product development especially to meet with the challenges organizations face in leading and developing their operations in digitalizing world. The Company’s focus areas for development are process mining and performance monitoring. The Company believes that the relevant market for these focus areas grows significantly in the future, as companies collect more and more transaction and other event data from their operations.

The Company accelerates the product development by increasing its resources in a controlled manner and allocating them especially to process mining, with the target of gaining a significant share of this growing market. In software development, special focus is placed on excellent user experience.

In the next few years, QPR seeks to grow especially its international software sales. In order to reach this target, the Company will this year increase resources and investments in international marketing and sales.

SHARE AND SHAREHOLDERS

The Annual General Meeting held on March 22, 2016 approved the Board's proposal that a per-share dividend of EUR 0.02 (0.05), a total of EUR 240 thousand (599), be paid for the financial year 2015. The dividend was paid to shareholders entered in the Company's shareholder register, maintained by Euroclear Finland Oy, on the record date of March 24, 2016. The dividend payment date was April 5, 2016.

OTHER EVENTS DURING THE REPORTING PERIOD

In January, QPR and the Swedish business and IT services company iStone announced that they have signed a reseller agreement for QPR ProcessAnalyzer. The partnership creates new opportunities in automated process mapping and process flow optimization, especially for those organizations using the ERP system Infor M3.

QPR and PricewaterhouseCoopers (PwC) Portugal announced in February that they have signed a consulting agreement on using QPR ProcessAnalyzer in PwC’s process and operational development consulting in Portugal. QPR ProcessAnalyzer enables automated process analysis based on existing data from enterprise IT systems, utilizing technology patented in the United States by QPR.

In March, QPR completed co-determination negotiations with its personnel.

QPR signed an agreement in March on delivering software for business process management purposes to one of the world’s largest lighting manufacturing companies. The signed agreement is valid for three years, and the value of the entire three-year agreement is approximately EUR 0.2 million before reseller commissions.

In March, QPR announced the launch of QPR MobileDashboard, an application that makes it even easier to access and browse actionable performance information on the go.

QPR was listed in April as a representative vendor in the Gartner Market Guide for Enterprise Business Process Analysis (EBPA). Globally the Gartner Market Guide lists 22 representative vendors offering solutions in this market.

In May, QPR received additional intellectual property protection for its process mining technology. This was already the second patent that the United States Patent and Trademark Office has awarded for the technology in question. The patented technology is utilized in QPR ProcessAnalyzer, an application developed by QPR. QPR’s previous patent from 2015 related to the utilization of event instance data obtained from information management systems to help organizations analyze and improve their business processes. The latest patent now safeguards the technology behind predicting the probability of future events based on process analysis.

In June, the Company announced the release of the new QPR Suite 2016, the complete portfolio of business management tools for planning, executing and monitoring strategy-driven operations. The newest developments in QPR technology bring enhancements to user experience and enable easy integration between QPR products and third party software. New features of the QPR Suite 2016 further strengthen QPR’s offering as a value-adding solution provider for strategy execution, business-IT alignment, performance and process management and process mining.

In June, QPR made a deal to deliver QPR ProcessDesigner and QPR Metrics, as well as professional consulting services to a leading European engineering group. The duration of the contract made is three years, and it is worth well over EUR 0.2 million.

In August, QPR struck a deal with a leading furniture retailer in Saudi Arabia to deliver a comprehensive, easy-to-use software solution for strategy execution and quality management. The deal is a significant market opening in Saudi Arabia, where the demand for software solutions on strategy execution and quality management is experiencing strong growth in both private and public sectors.

In September, QPR delivered process mining and process performance management software to a leading IT and business process outsourcing service provider. The customer is a member of Fortune 500, offering services to customers globally from over 50 locations worldwide. The customer uses QPR ProcessAnalyzer for continuously analyzing and monitoring the business process services provided to its customers. This helps the customer to improve the efficiency and quality of their services, and to proactively ensure that service-level agreements are met. QPR ProcessAnalyzer automatically generates a variety of visual analyses for discovering process flow charts, variations, bottlenecks and KPIs based on the customer’s operational data. The three-year contract is worth approximately 0.25 million.

In November, QPR was informed that the Finnish Market Court has annulled the procurement decision made by the City of Helsinki on July 2, 2015, to choose QPR Software’s offer of delivering its process modeling and enterprise architecture tool as a service. The procurement decision was made for a contract period of 4 years and valued at EUR 1.5 million. Procurement agreement has not been signed, and QPR has not delivered services or booked income based on the procurement decision. In its decision, the Market Court orders the City of Helsinki not to make a procurement agreement based on the procurement decision.

In December, QPR announced that t he Ministry of Finance in Finland orders public sector enterprise architecture modeling service and related professional services from QPR. The service is available to all parties participating in public sector enterprise architecture development and approved by the Ministry’s Public Sector ICT Department. The contract term covers the years 2017–2020. The contract value depends on the amount of user rights and professional services to be ordered for the architecture modeling service, but during the first two years of the contract term is EUR 0.2 million in minimum value.

OTHER EVENTS AFTER THE REPORTING PERIOD

In February 2017, QPR announced to deliver process mining software to a leading European energy company producing heat and electricity from several energy sources including but not limited to wind, hydro, solar and biomass. The company aims to use QPR ProcessAnalyzer for continuous monitoring and measurement of their customer interfacing business processes like quotation, contracting and invoicing. This customer identified process mining as a new opportunity for enhancing customer satisfaction and profitability, and chose QPR ProcessAnalyzer for its unique set of features enabled by the patented process mining technology.

In February, QPR announced to deliver process mining software and professional services to a leading global high tech company, which serves large enterprises, consumers and governments. Before investing in automation and robotics, the customer wants to make sure that investments are targeted and prioritized correctly. Process mining was evaluated as a perfect methodology for this. The company chose QPR as service and software provider for superior expertise and technical capabilities in process mining. The contract is worth over EUR 0.2 million.

GOVERNANCE

The Annual General Meeting (AGM) on March 22, 2016 resolved that the Board of Directors consists of four (4) ordinary members. The AGM re-elected the following members to the Board of Directors: Kirsi Eräkangas, Vesa-Pekka Leskinen, Juho Malmberg and Topi Piela. In its meeting following the AGM, the Board of Directors elected Vesa-Pekka Leskinen as Chairman of the Board.

The AGM elected KPMG Oy Ab, Authorized Public Accountants, to continue as QPR Software Plc's auditors, with Kirsi Jantunen, Authorized Public Accountant, acting as principal auditor. The term of office of the auditor expires at the end of the next AGM.

The AGM authorized the Board to decide on an issuing new shares and conveying own shares held by the Company (share issue) either in one or in several occasions. The share issue can be carried out as against payment or without consideration on terms to be determined by the Board.

All authorizations of the Board and other decisions made by the AGM are available on the stock exchange release published by the Company on March 22, 2016 and available on the investors section of the Company's web site, ( http://www.qpr.com/investors/annual-general-m...eting-2015 ).

SHORT-TERM RISKS AND UNCERTAINTIES

Internal control and risk management at QPR Software aims to ensure that the Company operates efficiently and effectively, distributes reliable information, complies with regulations and operational principles, reaches its strategic goals, reacts to changes in the market and operational environment, and ensures the continuity of its business.

QPR has identified the following three groups of risks related to its operations: risks related to business operations (country, customer, personnel, legal), risks related to information and products (QPR products, IPR, data security) and risks related to financing (foreign currency, short-term cash flow). The Company has an insurance policy for property, operational and liability risks.

Financial risks include reasonable credit risk concerning individual business partners, which is characteristic to any international business. QPR seeks to limit this credit risk by continuous monitoring of standard payment terms, receivables and credit limits. In 2016, EUR 57 thousand (49) of credit losses were recorded. The amount of trade receivables over 60 days past due was 12% (6) of total trade receivables at the end of the quarter. The significant increase was due to delay of a single notable receivable, which however was received in January 2017.

Approximately 81% of Group’s trade receivables were in euro at the end of the quarter (82). At the end of the quarter, the Company had not hedged its non-euro trade receivables.

QPR has initiated an arbitration process due to a customer’s decision to dissolve a contract, as QPR regards this dissolution unjustified. The value of the contract is less than EUR 100 thousand and less than EUR 50 thousand has been recognized as revenue. The customer has made a counterclaim with demands worth under EUR 100 thousand. QPR believes that the counterclaim made by the customer is unfounded.

No significant changes have taken place in the Company’s short-term risks and uncertainties during the quarter. Risks and risk management related to the Company’s business are further described in the Annual Report 2015, pages 14-15 ( http://cdn.qpr.com/sites/default/files/QPR_So...2015_1.pdf ).

THE BOARD OF DIRECTORS’ PROPOSAL ON DIVIDEND

The distributable funds of the parent company were EUR 528 thousand at December 31, 2016. The Board of Directors proposes to the Annual General Meeting on March 28, 2017 that a dividend of EUR 0.03 per share be paid to shareholders for the financial year 2016, totaling EUR 360 thousand. The dividend shall be paid to a shareholder that has been entered into the Company’s shareholder register on the record date of the dividend payment on March 30, 2017. The Board of Directors proposes to the AGM that the dividend be paid on April 7, 2017.

No material changes have taken place in the Company’s financial position after the end of the financial year.

FINANCIAL INFORMATION

In 2017, QPR Software Plc will publish its financial information in Finnish and English as follows:

• Annual Report 2016: Friday, March 3, 2017
• Interim Report 1–3/2017: Thursday, April 27, 2017
• Half Year Report 1–6/2017: Thursday, August 3, 2017
• Interim Report 1–9/2017: Thursday, October 26, 2017

The Annual General Meeting will be held on Tuesday, March 28, 2017.

QPR SOFTWARE PLC BOARD OF DIRECTORS

Further information: Jari Jaakkola, CEO Tel. +358 (0) 40 5026 397

Distribution: NASDAQ OMX Helsinki Ltd Main Media

NOTES TO INTERIM FINANCIAL STATEMENTS

ACCOUNTING PRINCIPLES

This report complies with requirements of IAS 34 Interim Financial Reporting. Starting from the beginning of 2016, the Group has applied certain new or revised IFRS standards and IFRIC interpretations as described in the Consolidated Financial Statements 2015. The implementation of these new and revised requirements have not impacted the reported figures. For all other parts, the accounting principles and methods are the same as they were in the 2015 financial statements.

When preparing the consolidated financial statements, management is required to make estimates and assumptions regarding the future and to consider the appropriate application of accounting principles, which means that actual results may differ from those estimated.

All amounts presented in this report are consolidated figures, unless otherwise noted. The amounts presented in the report are rounded, so the sum of individual figures may differ from the sum reported. This report is unaudited.

During the reporting period, the Group did not have any financial instruments measured at fair value.