Tuesday, 8 September 2009

SQS: managed testing services and staffing flexibility are the keys to future success

(By Philip Carnelley, 8 Sep 09, 17:30) Following the SQS briefing, there are a couple more points to add, to follow up our earlier note (Less testing markets for SQS). First, on the numbers: it wasn’t all bad news on revenue. While Germany was down 5% year on year (to €32m) and the UK a rather heart-stopping 33% (21% at constant currency), to €16m, Switzerland jumped 44% to €10m and accounted for 15% of revenue – the company said it had landed some good contracts from mid-size Swiss banks.

But the revenue drop in the
UK and Germany undoubtedly caught the company on the hop, and it took time to adjust. So profit plummeted in both its primary markets of the UK and Germany – a combination of staff underutilisation and falling prices – to give overall EBIT margin down from 9% to just 3%, and near-zero in the UK. CEO Rudolf van Megen said that the company has “learned its lesson” and that it is now in a position to be more flexible. This will be helped by the ongoing move to a higher proportion of offshore resources. As we have commented before, it has a goal to have 25% onshore and 75% offshore within 3—5 years (it’s the opposite ratio, today). This will also help it compete with the Indian SIs on price. It does however want to maintain a blended approach, believing 100% offshore is undesirable on a testing project.

On strategy and outlook, the company was quite upbeat. It believes a lot of work was deferred, not lost, and will return. More strategically, it is looking to build an increasing proportion of its business as multi-year, managed testing services contracts. It says it now has the experience to create a fixed price business proposal, allowing its major customers both budgetary certainty and cost reductions on in-house or ad-hoc time&materials testing contracts – the figure of 20% was suggested. It believes the time is right for such an offering and is projecting that 50% of its business will arise from such services within five years (up from around 10% today). While the downside (for SQS) is that it’s taking on more risk over its contracts, the upside is better revenue visibility, which should improve business planning and potentially company valuation too.

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