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Change comes at a cost and software testing and quality management services provider SQS demonstrated that during 2011 (to December 31 2011) as it continued its much needed push towards offshoring and managed services (see SQS – the ‘Indie’ fights back!).
Although revenue was up 16% to 189m Euros, adjusted profit before tax dropped 16.5% to 7.3m Euros. Gross profit margin also fell, from 32% last year to 30.5% in 2011. This profile is not so surprising. SQS has built its growth strategy around managed services and moving operations offshore but the transition is a tricky one to make as the push for top line revenue can easily impact margins, something the 2011 results reflect. SQS management is conscious of the issue and says that where 2011 was a year for top line growth, the focus for 2012 will be on improving the average price of engagements and margins.
Moves to change the early stage cost and cash flow profile for managed services appear to be paying off and contracts signed from H2 2011 have the improved early stage profile. Managed services revenue is now 22% of total revenue (vs 11% in 2010) and delivered c42.2m Euros revenue. Of the total managed services revenue, 27.4m Euros related to mature contracts generating a gross margin of 38.4%. 14.8m Euros was gained from less mature contracts and gross margins here were considerably lower at 12.9%. The size of the gulf is surprising and it will take time for it to be bridged and we expect it will be a drag on margins down for some time yet.
During the year demand for SQS’s offerings was strong in the SQS-defined UK, Ireland and India region where there was 13.2% revenue growth, but central Europe Middle East topped this rate with 18.5% growth.
Managed services is still way off the 50% target but growing. Meanwhile off/nearshore staff levels are now up to 42% of the total for consultancy staff (vs 39% last year), but again there is a gap between where SQS is and where we think it should be (60%+). SQS is making progress on its transition but still has a way to go and margins will be the marker of how will it is progressing. With the news that CEO Rudolf van Megen will step down in September after 30 years, SQS is set for further change.
