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The recovery and growth strategy at testing and quality management provider SQS is stuttering and the company has issued a warning that PBT will be below analysts’ estimates.
Profit for the year has been negatively hit by transition costs of up to Euro 2m. This is the result of costs involved in moving two managed services contracts to an on shore/off shore delivery model that the supplier has not been able to recover. As a result PBT will be below analysts’ forecasts although revenue is expected to be slightly ahead. Based on the warning, our friends at Panmure Gordon have revised PBT down to Euro 8.3m. Revenue estimates for the full year come in at Euro 188m. Last FY SQS delivered revenue of Euro 163m (see SQS – the ‘Indie’ fights back!)
The managed services business has been the revenue driver. Order intake was cEuro 62m and contributed 20% of 2011 revenues compared to 11% in FY10. It is heading towards the goal of accounting for 50% of revenues by 2014 but still has a long way to go. Margins are improving however, with SQS stating that all the new Managed Services contracts closed during 2011 had a better early stage margin and cash flow profile than previous ones and as they mature and move offshore it expects further margin improvement.
Although the transition cost loss is probably a one-off, it follows a warning at the end of H1 of flat revenues for the rest of the year (see SQS has good H1 but downgrades outlook). The growth strategy looks like it is still moving ahead but with slower momentum.
