05/25/2004

QSC anticipates positive free cash flow for second quarter of 2004

Cologne, May 25, 2004. Cologne-based QSC AG got off to a successful start in its 2004 fiscal year. In the first quarter, the company accelerated its revenue growth, earned a positive EBITDA for the first time and now plans to achieve a sustained positive free cash flow for the second quarter of 2004, earlier than had been planned.
In the first quarter of 2004, QSC grew its revenues by 16.7 percent to EUR 32.2 million, as opposed to EUR 27.6 million for the first quarter the year before. The company´s revenues were up by 6.3 percent from the preceding quarter (Q4 2003: EUR 30.3 million), thus doubling its average quarter-to-quarter growth rate by comparison with growth in 2003 following the Ventelo acquisition. Strong demand on the part of business customers for VPN solutions and the value added services that build upon them again proved to be the growth driver. In the first quarter of the current fiscal year, QSC generated 21 percent of its total revenues with these strongly growing large enterprise accounts, alone, while 39 percent of total revenues came from small and medium enterprises.

Gross margin of 21 percent
In spite of its accelerated revenue growth, in the first quarter of 2004 QSC reduced its network expenses by more than 6 percent to EUR 25.4 million, as opposed to EUR 27.1 million for the first three months last year. This decline was attributable to both synergy effects following the successful conclusion of the Ventelo integration, as well as to a sustained policy of strict cost management.
Thanks to higher revenues and lower network expenses, QSC succeeded in dramatically improving its gross profit. As opposed to EUR 0.5 million for the same quarter the year before, the company earned a gross profit of EUR 6.8 million in the first three months of 2004. CEO Dr. Bernd Schlobohm views this growth of more than 1200 percent a confirmation of the scalability of QSC´s infrastructure-based business model: "We´ve stressed right from the very beginning that after breaking even every additional euro in revenue will leverage QSC´s results - and that´s exactly what we´re seeing now in terms of both gross profit and EBITDA after we have crossed the profitability threshold."
The results of strict cost management are also underscored by the decline in other operating expenses. At EUR 6.7 million in the first quarter of 2004, they were down by 36.2 percent from the first quarter of 2003, where they had stood at EUR 10.5 million. General and administrative expenses were halved, from EUR 4.2 million to EUR 2.1 million. In its general and administrative functions, the company benefited greatly from the consolidation of the QSC and Ventelo administrations in the Cologne location ahead of schedule during the fourth quarter of 2003.

Sustained positive EBITDA
Strong growth in revenues from project and business customers, along with successes in cost management, combined to produce the company´s first positive EBITDA in the first quarter of 2004. QSC generated an operating profit of EUR 0.1 million before depreciation and amortization; the year before, the EBITDA loss had stood at EUR -10.0 million for the comparable period. The company´s net loss dropped by 70.7 percent to EUR -5.5 million.

QSC crosses cash flow breakeven point
The first quarter of 2004 marked the last time that QSC recorded a cash burn: It amounted to EUR -15.5 million, as opposed to EUR -10.9 million for the first three months of 2003. As of March 31, 2004, QSC´s financial statements recorded net liquid assets of EUR 38.8 million, and continued to contain virtually no debt.
QSC anticipates achieving a cash flow surplus for the second quarter of 2004, one quarter earlier than had been planned. "QSC is earning money today," stressed CEO Schlobohm in connection with the presentation of the quarterly report. "And we anticipate sustained cash flow surpluses in the coming quarters." Given the highly positive development of the company´s operating business, Schlobohm also reiterated QSC´s forecasts for 2004: He expects revenues to rise by at least 20 percent to more than EUR 138 million, along with a sustained positive EBITDA.

The complete quarterly report is available here.

Queries to:

QSC AG
Claudia Zimmermann
Corporate Communications
Fon: +49(0)221-6698-235
Fax: +49(0)221-6698-289
E-Mail: presse@qsc.de

Arne Thull
Investor Relations
Fon: +49(0)221-6698-724
Fax: +49(0)221-6698-009
E-Mail: invest@qsc.de

Notes:
This corporate news contains forward-looking statements pursuant to the US "Private Securities Litigation Act" of 1995. These forward-looking statements are based on current expectations and forecasts of future events by the management of QSC AG. Due to risks or mistaken assumptions, actual results may deviate substantially from those made in such forward-looking statements. The assumptions that may involve material deviations due to unforeseeable developments include, but are not limited to, the demand for our products and services, the competitive situation, the development, dissemination and technical performance of DSL technology and its prices, the development and dissemination of alternative broadband technologies and their respective prices, changes in respect of telecommunications regulation, legislation and adjudication, prices and timely availability of essential third-party services and products, the timely development of additional marketable value-added services, the ability to maintain and enlarge upon marketing and distribution agreements and to conclude new marketing and distribution agreements, the ability to obtain additional financing in the event that management´s planning targets are not attained, the punctual and full payment of outstanding debts by sales partners and resellers of QSC AG, and the availability of sufficient skilled personnel.