Despite issuing positive vibes about the business earlier this month (see SQS managed services boosted by substantial deals), software testing specialist SQS surprised everyone with the news that is going to miss its profit target for the year. Investors weren’t too pleased with the sudden change in tack, and slashed 8% off its shares.
SQS blamed some of its larger managed services clients for missing its profit before tax (PBT) target after they suspended ‘extended engagements’ to control their own costs ahead of year end. Ironically, SQS said revenue will be slightly ahead of expectations as it saw higher demand for services from contractors, although this is lower margin business.
The clients concerned had apparently already significantly exceeded their minimum contracted spending commitments, and were therefore in a position to freeze further spending at their own discretion. The situation means SQS’ revenue and PBT from permanent consultants was €1m lower in the last full working week of 2012.
This really shows the risks of flexible contracting, which allow for services to be switched on or off according to demand. However, we would have expected SQS to have built in contingencies to avoid this unexpectedly damaging profitability.
Despite the disappointing end to the year, 2013 looks like it should be a whole lot better thanks to growth in new managed services business. Order intake during 2012 was €101m, up 51% on the previous year, with an order backlog of €98m at the year end. It has also implemented a ‘minimum margin policy’ for all new business. The real challenge will be achieving this while retaining enough flexibility in its contracts with customers.