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8th March 2007, 10.49
SQS shares up on growth
Phil Codling (Ovum)
AIM-listed testing services provider SQS has reported its 2006 results. Revenue was up 44% to €78.9m. Organic growth, excluding the impact of acquisitions, was 18%. Operating profit grew by 28% to give an operating margin of 7.3% (compared to 8.2% in 2005). Earnings per share were 0.2p (2005: 0.28p).
Comment: SQS continues to perform well and to take market share. The European testing market is providing plenty of opportunities for growth right now but 18% organic growth is comfortably in excess of broader market rates. The addition of the acquired Cresta operation (from 1st July) provided an additional boost to second half growth (which appears to have picked up organically too) and has further reinforced SQS's position as Europe's largest independent software tester. It also appears that the hiring activity that depressed H1 profits has translated into utilisation and revenue in H2. The addition of 100 new clients during the year (taking the total to 400) is key. We said six months ago that SQS needed to win enough business to keep its new hires busy, and fortunately it looks to have achieved this.
Speaking to SQS management this morning, it's clear that they see the company's 'no.1 in Europe' positioning as a key differentiator and driver of business. They also appear to be benefiting from customers' desire to bring in testing solutions that are not tied to a systems integrator or ISV. Other beneficiaries of this attitude among customers include the larger Indian offshore providers, whose testing revenues have been rising rapidly. SQS claim they operate in a different (i.e. more automated and more high-end) space to Infosys, Wipro et al. Given their adaptability and increasing presence onshore, the Indian players could increasingly encroach on SQS's market, and that is something it will have to watch. Emphasising its own independence (something the large Indian players will increasingly find hard to do) and 'pure play' testing credentials would seem to be its strongest suit in this regard, as well as continuing to build out its own offshore options in South Africa. Offshoring is also proving key to selling longer-term, multi-year deals, which still make up just a small fraction of SQS's business.
All in all, these are encouraging results and the company's ability to win business and grow has allayed any concerns we had on risks to profitability following H1. Investors are impressed too, pushing shares up 7% in trading this morning.