SQS passes the test

(By Anthony Miller – Tuesday, 10th March 2009 9:30am). There aren’t many players out there saying they expect “a similar healthy performance for the first quarter of 2009 ... looking forward to the remainder of the year with a significant degree of confidence” with any real credibility, but Germany-based and London-listed testing company SQS does seem to be one of the few.

In today’s prelims (see here), SQS reported turnover of €143m last year (2007: €121m) with German growth up 23% to €69m (almost all organic) and UK revenues up 9% to €46m in constant currency but down 5% due to the €/£ translation. Gross margins ticked up 20 bps to 34.7% but operating margins eased likewise to 8.3%.

The things that struck me were the uplift in long-term contracts (now 14% of total revenues vs 11% in 2007) and the 75% contract renewal rate. These were underpinned by SQS’s growing offshore delivery capability, which now comprises almost 25% of total headcount. Much of this came from SQS’ acquisition of India-based VeriSoft in June 2008 (see SQS tests India – and a lot more besides) and management is looking to buy more.

I’ve always seen testing as a ‘non-discretionary’ activity and I think SQS CEO Rudolf van Megen makes a valid point that regulatory directives such as Basel II, SOX and MiFID imply and impose stricter disciplines on software validation. But further, in the current ‘make do and mend’ climate, companies are far more likely to tweak existing applications rather than install new ones, and this just makes testing more and more complicated. Like Micro Focus, also ‘focused’ on legacy applications, SQS is in the right place and the right time with the right products and services.