SQS leans on German strength to counter UK lull, analysts mixed

Software testing group SQS Software Quality Systems relied on healthy demand in Germany, Switzerland, Austria and the Netherlands to counter weakness in its key UK division.

Chief Executive Officer Diederik Vos said the group had started to accelerate its search for acquisitions outside Europe.

A trading update the company made at its annual general meeting revealed that customer demand and hence sales were "relatively flat" in the Nordics and UK, which represents more than a third of expected revenues for the current year.

But the Cologne-headquartered company said this had been more than compensated for by strong sales performance in its other North European markets.

Moreover, SQS's emergent US business was reported to be "progressing well" and management said they were confident this unit would deliver a positive EBIT (earnings before interest and taxes) contribution in the second half of the year.

Vos added that the Managed Services segment, a higher margin business, had witnessed "especially strong growth" and the company was looking to significantly increase headcount in its offshore test centres in India and Egypt.

In the first quarter of the year, Managed Services represented approximately 40% of SQS revenues, up from 34% for the year to 31 December 2012, and is now the largest component of group sales.

"To support our expansion further," Vos said, "we have also accelerated our search for acquisitions, with a focus on strengthening our offshore resources and expertise."

"The healthy demand we experienced in the first quarter has continued into the second, giving us confidence that we are on track to meet market forecasts for the current year."

Canaccord analyst Jonathan Imlah said the "improved visibility and less volatile margin fluctuation of the increasingly important managed services business should continue to drive a higher quality of earnings in the group."

But George O'Connor at fellow broker Panmure Gordon bemoaned a lack of comment on margin and cash, and said: "Given the company's mixed track record in achieving results we have elected to leave our FY estimates unchanged - consensus has fallen to our level - but we are very encouraged by the update."

Shares in SQS Software Quality Systems were up 0.8% at 334p at 12:20 on Wednesday.

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