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For a company that had issued a surprise profit warning (see here), Cologne-headquartered but AIM (and Frankfurt) listed testing services firm SQS ended the year with results that, on the face of it, many other IT services companies would surely have been proud to report!
Headline revenues for the year to 31st Dec. 2012 increased by 11% to €210.1m. Slower growth in cost of sales saw gross margins expand by 70bps to 31.2%. This all filtered down to the operating margin which stood at 4.4% (2011: 3.7%). Pre-tax profits soared by 40% to £7.9m, which was reflected in the 40% growth in EPS, at €0.21.
Let me say it’s been a while since I last looked at SQS in any detail and I will leave it to my learned colleague, Angela Eager, to add colour and movement later. But what I don’t quite understand is why a testing services business is only running a 4% operating margin. The 31% gross margin looks reasonable – indeed it’s not much below headline gross margins of some India-based SIs (e.g. Wipro– one of the testing services leaders – at 34%). So why are SQS having to spend some 27% of revenues on SG&A? Answers on postcards only, please … (not).
