USU Software : 9-Month Financial Report 2023

	9-Month Financial Report and
-	Report on the Third Quarter
of 2023

USU Software AG

USU AT A GLANCE

9-Month Report 2023	2023	2022
in EUR thousand, except earnings per share and
JAN. 1-SEPT. 30, 2023	JAN. 1-SEPT. 30, 2022
number of employees
SALES	97,819	92,874
Adjusted EBITDA	8,773	11,695
EBITDA	8,426	11,695
EBIT	4,824	8,155
NET RESULT	3,304	5,776
EARNINGS PER SHARE (EUR)
Diluted	0.31	0.55
Undiluted	0.33	0.58
CASH FLOW FROM OPERATING
ACTIVITIES	3,243	5,943
NUMBER OF EMPLOYEES AS AT JUNE 30	814	755
	SEPT. 30, 2023	Dec. 31, 2022
CASH AND CASH EQUIVALENTS	9,829	15,525
SHAREHOLDERS EQUITY	55,365	56,954
BALANCE SHEET	111,007	112,979
EQUITY RATIO	49.9%	50.4%

USU Software AG
Spitalhof	Investor Relations
D-71696 Möglingen	Falk Sorge & Dr. Thomas Gerick
Phone [phone]	Phone [phone] / 440
Fax [phone]	Fax [phone]
www.usu.com	[e-mail]

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LETTER TO SHAREHOLDERS

Dear Shareholders and Readers,

The USU Group continued to grow in the third quarter of 2023, posting increases internationally again in particular. Business with software-as-a-service (SaaS) business once again posted above-average growth. Although only some of the orders postponed in Q2 could be completed in the reporting quarter, USU is showing that it can grow sustainably even in the current difficult macroeconomic environment thanks to its strategic focus. We are thus also systematically continuing our investment projects in artificial intelligence and the cloud management market, as well as investing substantial funds in the new central USU product platform. This entails reduced margins in the current year, but in view of the medium-term planning we see these future investments as indispensable.

At a time of staff shortages, we have also adopted an employee share purchase program in order to achieve direct employee participation and thereby increase employee satisfaction and retention. This program was implemented at end of the third quarter. Up to 56,250 USU shares from the holdings of treasury shares acquired in the previous year were offered to USU Group employees at a discounted purchase price, with each employee being able to purchase up to a maximum of 75 shares depending on his or her length of service and contractual working hours. The program was taken up by the majority of eligible employees, but has not yet been completely finalized. We are delighted that large numbers of the USU workforce are now also among the USU Group's shareholders. However, it should be noted that a special aspect arises under IFRS in connection with this employee share purchase program, as this resulted in staff costs (share-based compensation) of EUR 347 thousand. Since these are IFRS- specific extraordinary expenses, the Management Board has decided to communicate earnings adjusted for extraordinary effects (adjusted EBITDA) starting from the third quarter of 2023 just passed. This figure is adjusted only for extraordinary effects arising from share-based compensation, restructuring, or acquisitions. As such, USU's guidance will relate to adjusted EBITDA from now on.

The Management Board will report on the adjustments transparently as usual, and is confirming the current guidance of sales growth to between EUR 132 million and EUR 139 million with a targeted further significant expansion of SaaS business and adjusted EBITDA of between EUR 13 million and EUR 15 million for 2023 as a whole. The Management Board is also reiterating the current medium-term planning, which forecasts average organic sales growth of 10% in the next few years and, in view of the continued growth in SaaS business, an increase in the adjusted EBITDA margin to between 17% and 19% by 2026.

Yours,

Bernhard Oberschmidt,

CEO of USU Software AG

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INTERIM GROUP MANAGEMENT REPORT FOR THE FIRST NINE MONTHS OF 2023 (UNAUDITED)

Basic information on USU Software AG and the Group

As the parent company of the Group, USU Software AG, Möglingen, Germany, has direct or indirect holdings in the following operational companies: USU GmbH, Möglingen, Germany; USU Software s.r.o., Brno, Czech Republic; USU Austria GmbH, Vienna, Austria; Omega Software GmbH, Obersulm, Germany; USU Solutions Inc., Boston, USA; USU SAS, Paris, France and USU GK, Tokio, Japan. In addition, USU Software AG has a shareholding in Openshop Internet Software GmbH, Möglingen, Germany, which is no longer operational.

At the start of the second quarter of 2023, USU Technologies GmbH and USU Solutions GmbH were merged into USU GmbH as part of the "One USU" strategy. The mergers combined the three legally independent entities USU GmbH, USU Solutions GmbH and USU Technologies GmbH within the USU Group as part of the continuing USU GmbH.

Business model, objectives, strategies and controlling system

As a leading provider of software and service solutions for IT and customer service management, USU Software AG and its subsidiaries (hereinafter also referred to as the "USU Group" or "USU") sets standards for better service quality. With USU, companies are responding to the changed customer and employee needs in a digital world. Well-known companies use USU solutions to create transparency, become more agile, cut costs, and reduce their risk - by means of smarter services, simpler workflows, and better collaboration. In addition to software asset management, IT service management, and IT service monitoring, the USU service portfolio also covers the areas of knowledge management, self-service management, digital service solutions, and AI services.

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INTERIM GROUP MANAGEMENT REPORT FOR THE FIRST NINE MONTHS OF 2023 (UNAUDITED)

More than 1,200 USU customers from all sectors of the global economy benefit from USU solutions. They include Allianz, Atruvia, Bechtle, BITBW, BMW, Deutsche Bahn, Deutsche Telekom, Swiss Post, Jungheinrich, LinkedIn, Novartis, Otto, VW, and W&W. USU Software AG has made it its goal to achieve growth in consolidated sales above the average level for the IT market as a whole in the years ahead while also further increasing its profitability. It will focus on organic growth through innovation and by expanding the Group's international market presence, though growth through acquisitions and equity investments is also a part of the corporate strategy.

The key performance indicators for USU Software AG and the Group are sales and adjusted EBITDA. Due to the increased share of extraordinary one-time effects, USU has started reporting "adjusted EBITDA" with immediate effect. This figure is adjusted for extraordinary effects arising from share-based compensation, restructuring, or acquisitions. In the third quarter, an employee share purchase program was launched for the first time, leading to the recognition of expenses of EUR 347 thousand. An option program is also planned for the management staff. This is covered by shares of the founder and majority shareholder Udo Strehl and therefore will not have any dilutive effect or impact on cash flow for USU. Nonetheless, expenses for share-based compensation will have to be recognized in connection with this in the future under IFRS. The current guidance for 2023 and the medium- term planning are thus based on adjusted EBITDA. Accordingly, adjusted EBITDA serves as an important planning and control parameter for USU Software AG and the Group alongside consolidated sales. According to the current guidance, the Management Board expects sales growth to between EUR 132 million and EUR 139 million and adjusted EBITDA of between EUR 13 million and EUR 15 million in fiscal 2023 thanks to the targeted further expansion of SaaS business.

Thanks to the success of the SaaS transformation, the associated high level of orders on hand, and the consistently strong consulting business, the Management Board is confirming the current medium-term planning, which includes average organic sales growth of 10% in the next few years and, in view of the continued growth in SaaS business, an increase in the adjusted EBITDA margin to between 17% and 19% by 2026.

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INTERIM GROUP MANAGEMENT REPORT FOR THE FIRST NINE MONTHS OF 2023 (UNAUDITED)

Research and development

In the recently published analyst report1 "The Forrester Wave™: Enterprise Service Management, Q4 2023," USU achieved the best score in the scorecard category of innovation. This evaluation, among other things, reflects the prominent role that research and development (R&D) plays throughout the USU Group. USU has been investing heavily in R&D for many years to expand the existing portfolio with new modules and to develop new and attractive products.

In the first three quarters of 2023, USU invested a total of EUR 16,009 thousand (Q1-Q3 2022: EUR 13,322 thousand) or 16.4% (Q1-Q3 2022: 14.3%) of consolidated sales in research and development. The total number of employees in this segment was 232 as at September 30, 2023 (September 30, 2022: 225). The USU Group's R&D expenses do not typically meet the criteria for recognition and hence are not capitalized.

The USU-wide R&D strategy centers on gradually creating a holistic SaaS-based platform, which will integrate the entire IT asset management, service management and IT operations management portfolio over the coming years. The individual solutions will be available as modular apps. The associated development work began in 2022 and continued in the first nine months of the year as planned. At the same time, the existing portfolio of the individual divisions was and continues to be continuously enhanced and expanded to include new innovations as it has been in recent years.

The R&D team in USU Service Management worked on a number of enhancements and improvements. For example, an Excel report option was added to the generic interface function and the layout in the USU shop module was improved. The new version of the self-service portal now has a more efficient search function and enhanced chatbot integration. A new version of the service desk app featuring improved identification of the person in question was also completed.

With regard to the USU IT Monitoring solution, work on the new release was continued, such as performance improvements. One focus here was the new server monitoring app, which makes it considerably easier to monitor servers thanks to its improved user guidance. At the same time, the underlying architecture opens up the possibility to offer monitoring functions as cloud services. With the same goal, the development of the end-to-end monitoring app was completed this quarter.

1 cf. The Forrester Wave™: Enterprise Service Management, Q4 2023 dated November 6, 2023, published at https://www.forrester.com/report/

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INTERIM GROUP MANAGEMENT REPORT FOR THE FIRST NINE MONTHS OF 2023 (UNAUDITED)

R&D work in USU Software Asset Management (SAM) is currently focusing on two main tasks: In addition to integrating the SaaS management solution in the new USU platform, improvements in SaaS and SAP® software are particularly important. For example, new functions have been introduced to allow for better management and optimization of the authorization-based user metric in SAP. On top of this, there are more detailed analyses and processing options for technical use.

Generative AI was at the heart of R&D activities in USU Knowledge Management. Its core product, the active knowledge database, was enhanced with an AI-based assistant that provides support for users in many situations. Content quality is also becoming increasingly important due to the use of generative AI. USU is taking account of this development with the new "active editor," which manages knowledge in individual, combinable modules or blocks. In the self-service area, the new chatbot version and the new HelpCenter module were completed, offering much better integration and allowing for additional use cases, for example in sales.

The R&D team in USU AI Services is developing new, AI-based technology components for the existing USU portfolio. For example, it now allows the new AI-based ticket routing for service management to learn tickets incrementally, meaning that training for new tickets can be initiated much more frequently. In addition, visual monitoring of the training process has been integrated to allow for early controlling. Extensive research is also currently in progress to enable USU to operate and train large language models (LLMs) internally too in the future. In USU Cloud Management, a new cloud cost management service was launched in the reporting period. This provides customer organizations with user-friendly cost reporting for complex multi-cloud environments from AWS, Google Cloud Platform, and Azure. Regular reports, a detailed interpretation of the results, and support in taking the next steps by USU cloud experts help ensure cost transparency and minimize financial risks. Based on experience, the ROI in cloud cost management is only a few months.

Two research projects are currently active: AutoQML and KISS. Both projects use the new AI Wizzard, a tool for automating the creation of data-driven services. Specialist departments can use this to develop successful AI models without the help of data scientists. Its practical suitability is currently being tested in several use cases, for example at KEB, a manufacturer of industrial drives and solutions for process automation.

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INTERIM GROUP MANAGEMENT REPORT FOR THE FIRST NINE MONTHS OF 2023 (UNAUDITED)

Economic report

Overall economic development

According to a report from the German Federal Statistical Office ("destatis") 2 dated October 30, 2023, German gross domestic product (GDP) decreased slightly by 0.1% in the third quarter of 2023 - adjusted for inflation, seasonal and calendar effects - after revised destatis figures showed that it had increased slightly in the second quarter of 2023 (revised +0.1%) and stagnated in the first quarter of 2023 (revised 0.0%). Destatis also reported that private household consumer spending saw a particular decline. By contrast, equipment investment delivered positive impetus.

GDP in the third quarter of 2023 was 0.8% lower than in the third quarter of 2022 after adjustment for inflation. The decline was 0.3% lower after adjustment for inflation and calendar effects, as there was one less working day than in the previous year.

According to a provisional flash estimate by the Statistical Office of the European Union (Eurostat) 3, the euro area saw a quarter-on-quarter decline in seasonally adjusted GDP of 0.1% in the third quarter of 2023 after an increase of 0.2% in the second quarter of 2023 and no change in the first quarter of 2023 according to Eurostat figures. According to Eurostat information, seasonally adjusted euro area GDP increased by 0.1% year-on-year in the third quarter of 2023.

Sector development

The digital industry association Bitkom4 found that the business climate in the digital sector worsened overall in September 2023. Its digital index, which shows the business climate in the digital sector based on a monthly ifo economic survey and is calculated as the geometric mean of the values for the current business situation and business expectations, recorded a decrease of 3.2 points to 5.9 points in September. This reflected the fact that ICT companies rated their business expectations more weakly in September 2023 than in the previous month (down 3.9 points at minus 12.4 points), while the business situation was also rated worse than in the previous month at 25.9 points (down 2.3 points) but was still evaluated positively overall.

2cf. Destatis press release no. 420 dated October 30, 2023, published at https://www.destatis.de

1. cf. Eurostat press release 123/2023 dated October 31, 2023, published athttp://ec.europa.eu/eurostat
2. cf. Bitkom-ifo digital index: September 2023 published at www.bitkom.org
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INTERIM GROUP MANAGEMENT REPORT FOR THE FIRST NINE MONTHS OF 2023 (UNAUDITED)

Business development in the third quarter of 2023

With a recovery in international business and thanks to a significant rise in SaaS sales, USU Software AG and its subsidiaries (hereinafter also referred to as the "USU Group" or "USU") increased their consolidated sales by 1.0% to EUR 32,921 thousand in the third quarter of 2023 (Q3 2022: EUR 32,579 thousand) despite orders being postponed on account of the economy. This upturn was driven chiefly by the USU Group's international business, which picked up by 6.1% to EUR 9,121 thousand in the reporting quarter (Q3 2022: EUR 8,599 thousand). Following a dip in sales from international business in the previous quarter, there was a significant recovery last quarter, leading to the increase in sales. Accordingly, the proportion of consolidated sales attributable to international business rose from 26.4% in the same period of the previous year to 27.7% in the third quarter of 2023.

Broken down by sales type, the USU Group once again generated the highest growth with SaaS solutions. USU thus increased its SaaS sales by 15.1% year-on-year to EUR 4,300 thousand in Q3 2023 (Q3 2022: EUR 3,736 thousand). At the same time, however, license revenue was around two-thirds lower than in the previous year at EUR 1,329 thousand (Q3 2022: EUR 3,987 thousand) as a result of the strategic shift from one-time license business to SaaS business. Maintenance sales also decreased slightly by 1.3% to EUR 6,415 thousand (Q3 2022: EUR 6,499 thousand). Thanks to strong SaaS business, total recurring revenue (maintenance sales including SaaS revenue) climbed by 4.7% to EUR 10,715 thousand (Q3 2022: EUR 10,235 thousand). In the same period, USU's consulting sales also increased by 12.0% year-on-year to EUR 20,608 thousand (Q3 2022: EUR 18,400 thousand). Other income, which essentially comprises sales of third-party hardware and software, amounted to EUR 269 thousand (Q3 2022: EUR -43 thousand).

The USU Group's cost base increased by a total of 6.7% year-on-year to EUR 31,769 thousand (Q3 2022: EUR 29,766 thousand) as a result of the business growth and the related expansion of the consultant team and the use of additional freelancers and partners, as well as higher R&D investment in artificial intelligence, the market for cloud management and in the new central product platform, higher staff costs as a result of inflation, and one-time expenses resulting from the employee share purchase program. As a result of the decline in high-margin license revenue and a simultaneous rise in costs, earnings before interest, taxes, depreciation and amortization (EBITDA) decreased by 44.3% year-on-year to EUR 2,469 thousand in the reporting quarter (Q3 2022: EUR 4,432 thousand). Adjusted for the one-time expenses from share-based compensation of EUR 347 thousand (Q3 2022: EUR 0 thousand), adjusted EBITDA came to EUR 2,816 thousand (Q3 2022: EUR 4,432 thousand).

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INTERIM GROUP MANAGEMENT REPORT FOR THE FIRST NINE MONTHS OF 2023 (UNAUDITED)

At the same time, EBIT amounted to EUR 1,232 thousand (Q3 2022: EUR 3,216 thousand). This corresponds to a year-on-year decline in EBIT of 61.7%. Net finance income amounted to EUR -21 thousand in the third quarter of 2023 (Q3 2022: EUR 138 thousand). The lower earnings caused income taxes to contract from EUR 1,112 thousand in the third quarter of 2022 to EUR 353 thousand in Q3 2023. Overall, USU's consolidated earnings in the third quarter of 2023 came to EUR 858 thousand (Q3 2022: EUR 2,242 thousand), 61.7% lower than in the previous year. With an average of 10,523,770 (Q3 2022: 10,523,770) shares outstanding, this corresponds to diluted earnings per share of EUR 0.08 (Q3 2022: EUR 0.21), while basic earnings per share came to EUR 0.09 (Q3 2022: EUR 0.21) with an average of 10,000,000 (Q3 2022: 10,523,770) shares outstanding.

Business performance in the first nine months of fiscal 2023

Development of sales and costs

Consolidated sales

From a nine-month perspective, USU generated sales growth of 5.3% to EUR 97,819 thousand (Q1-Q3 2022: EUR 92,874 thousand). The USU Group increased its sales in Germany by an above-average 6.5% to EUR 75,439 thousand (Q1-Q3 2022: EUR 70,863 thousand) as a result of strong consulting business in Germany. International business also increased by 1.7% year-on-year to EUR 22,380 thousand in the first nine months of the year (Q1-Q3 2022: EUR 22,011 thousand) thanks to the positive development in the reporting quarter. The proportion of USU's consolidated sales attributable to international business was thus almost at the previous year's level at 22.9% (Q1-Q3 2022: 23.7%).

Broken down by sales type, USU recorded a particularly high year-on-year increase in SaaS sales of 20.4% to EUR 12,514 thousand (Q1-Q3 2022: EUR 10,397 thousand). USU built up high recurring SaaS orders on hand in past years as a result of the shift from one-time license business to SaaS business and these will continue to grow significantly in the future as SaaS makes up an increasing share of new business. At the same time, USU benefited from license business in previous quarters and related maintenance business. Maintenance sales rose by 3.6% year-on-year to EUR 19,387 thousand (Q1-Q3 2022: EUR 18,706 thousand). USU thus increased its recurring revenue by 9.6% year-on-year to EUR 31,901 thousand in the first nine months of the year (Q1-Q3 2022: EUR 29,103 thousand), meaning that the share of total sales attributable to recurring revenue rose to 32.6% (Q1-Q3 2022: 31.3%). At the same time, however, license revenue was down 64.8% on the previous year at EUR 3,457 thousand in the first nine months of 2023 (Q1-Q3 2022: EUR 9,810 thousand) as a result of the move to SaaS and order postponements by potential new customers in the reporting period.

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