Depending on which page you read, they are either “the world’s largest pure play supplier of independent software testing and quality management services” or ‘merely’ “one of the largest independent European pure play providers of software testing and quality management services”. But whatever the puffery, Cologne-based and AIM-listed testing firm, SQS, appears to be getting its business back on track.
Revenues for the year to 31st Dec. 2010 grew by 21% to €163m (18% at constant exchange rates – and all organic) with gross margins inching up 10bps to 31.8%, though EBIT margins trimmed by the same to 4.3%. According to SQS’, this makes them the largest testing services ‘pure-play’. Maybe so, but to put this claim in context, their revenues are not even half those of the (admittedly US-focused) testing services divisions of the Indian majors, led by Wipro, which generated over $560m from testing in 2010, albeit ‘only’ 12% higher than in 2009.
The two key drivers of SQS’s recovery and growth strategy are offshoring and managed services. SQS has 31% of its billable workforce in offshore/nearshore centres, up from 27% (and see SQS and the offshore challenge). Management recognises that this just has to grow faster (frankly they need to be more like 60-70% offshore!) but the transition needs to be very orderly to ensure they get the margin benefit without sacrificing too much on the top line.
Managed services revenues now comprise 11% of the total, up from 7%. Again, there’s still a long march to the 50% target (see SQS and the journey from 7 to 50), but they are moving forwards. New managed services deals are being signed over much longer terms than the traditional 3-6 month rolling contracts for project-based services. SQS signed its largest ever managed services deal last July, worth some €15m over 3.5 years (see here).
The only part of SQS’ business still going backwards is its products, training and conferences division, where revenues declined by 9% to €6.1m and losses deepened to €2m. This is not quite as bad as it looks as some of the proprietary software products are rolled in with services contracts. However, training and conferences are among the worst places to be in a recession.
SQS' affable CEO, Rudolf van Megen, is far more upbeat about SQS’ prospects for 2011, a point I will gently exercise when I meet him and CFO Rene Gawron next week.