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There is scant detail in the pre-AGM trading update from software testing and quality management services provider SQS but the highly strategic managed services portion of the business is doing what it was supposed to do and is growing and now represents an increased percentage of overall revenue. It stood at 22% at the end of fiscal 2011 (December) vs 11% for the previous year so presumably has grown in the intervening months. Existing managed contracts are maturing - another strategic goal - leading to an improvement in the gross margin. This is something SQS needed to address but as we noted in SQS margins under pressure during transition, there is a gulf between the c38% margins on mature contracts to the c12% margins on new contracts that will take time to bridge and will act as a drain on profits in the meantime.
It is good to see the company pushing into new markets such as manufacturing, aided by a global partnership agreement with Siemens whereby it will provide software testing services to their manufacturing clients using the Siemens Teamcenter software product. Signed just this month it has already led to some smaller initial contract wins. It is a good opportunity but SQS needs to tread carefully to ensure that engagements do not conflict with its overall goal of seeking higher value contracts and steering clear of low margin work.
