Citywire
March 2007
Software tester SQS targets cars while growth and profit nearly double
The boss at testing company SQS Software Quality Systems is keen to point out that a modern
luxury sedan runs on about eight times as much computer code as Microsoft Office.
SQS (SQS), which increased its turnover and pretax profit by 44% last year, wants to target
the automotive industry as it consolidates its core European market.
Industry regulators will soon be seeking quality controls on the 60 million lines of code found in
new cars, chief executive Rudolph van Megen says.
You can imagine how difficult it is to get this working in the manner they want it to, so there is a
huge demand for quality because there have been so many quality problems in the past, Van
Megen told Citywire.
But the concept of independent testing software quality applies to all sectors, not just car
makers, so the business model is broad as well, says managing director David Cotterell.
There are no boundaries, he says. Companies want someone independent to check it all off so
its good to go to into production. Thats where we fit in with hundreds of quality assurance
engineers.
Pretax profit in the year to December rose to 5.3 million from 3.7 million in 2005 on turnover of
78.9 million against 54.7 million. The adjusted earnings per share advanced 27.3% to 0.28 from
0.22 last year.
The company has promised to issue a dividend of 0.08 this year, despite some German
regulatory hurdles to overcome. If the dividend plan fails, the company plans a 1.4 million share
buy-back programme to return cash to shareholders.
Either way shareholders will get a return, Van Megen said.
Growth was 18% organic and 26% acquisitive, well ahead of the European IT services market,
said the company citing a study by the European Information Technology Observatory.
Repeat revenues accounted for 75% of turnover. There were 400 active clients in 2006 including
100 new clients won during the year.
Last May Cologne-based SQS bought Cresta of the UK, increasing the parent companys UK
revenue threefold and securing its position as the largest independent software testing and
quality management company in the UK.
It was also earnings enhancing in its initial six month period of ownership and helped expand its
market into South Africa, the company said. Cotterell said the near-term focus would be on
existing markets.
Weve got a good footprint in our key markets in continental Europe and the UK and Ireland now
and we want to maximise our opportunities there in terms of revenue, market share, and of
course profit, Cotterell said.
With cheap labour costs comparable to India, the South African operation is to become an
outsourcing location for a chunk of the companys European testing business. Located in Durban
with 40 employees, it is headed to about 65 this year and 200 by the end of 2008.
Finance director Rene Gawron said net debt at the end of 2006 was at 3.2 million.It is a very
low net debt position to look at with a 60 million balance sheet total in terms of the size of the
company which is heading towards 100 million, he said.
I think were well-positioned for further acquisitions and we would seek to pay them
predominantly in SQS shares and the other ones that may be targeted are by far not as big as
Cresta was, he added.
SQS, the first German company with a primary listing on AIM, completed itsIPO in September
2005. It raised £10.8 million before expenses at an issue price of 190p.
Evolution Securities rated the shares a buy and set a price target of 275p after the revenue
growth beat expectations of 72.8 million and despite high second-half growth that added
training costs.
'This strong top-line momentum makes the shares look cheap,' Philip Sparks wrote in a note to
investors.
A decline in the share price after a December trading update reflected the company exceeding
growth, which required more training, rather than missing expectations, he said.
'Demand for SQS software-testing services remains strong amongst the firm's blue-chip client
list,' he said.
'On our current forecasts, the shares are trading on a full-year 2007 price to earnings ratio of
just under 10, a bargain rating for a pan-European company with a leading position in a fastgrowing
market.'
Altium also kept its buy recommendation and set a 275p price target.
'With a strong outlook and demand picture, the prospects for SQS remain upbeat,' Altium said.
Shares in SQS rose 9.5p or almost 5% to 205p on Thursday.
SQS has more than 750 employees with offices in Cologne, Munich, Frankfurt, Stuttgart and
Hamburg in Germany, and in London, Woking, Birmingham, Manchester in the UK.
It is also in Ireland, the Netherlands, Switzerland, Austria besides South Africa, with a minor
stake in an operation in Portugal and a partnership in Spain.