SQS Software Quality Systems AG Share News (SQS)

German software testing firm SQS Software Quality Testing Services is grabbing market share all over as it reaps the benefit of recent investment in staff and services.Turnover in 2010 rose by 21.2% to €162.9m from €134.3m in a year in which the testing services market in Europe was forecast to grow by 6.5%, according to Pierre Audoin Consultants (PAC), a market research and consulting firm for companies in the software and information technology industry."We have significantly outperformed the European testing market in parallel with increasing profit before tax," SQS's chief executive officer, Rudolf van Megen, told Sharecast.Adjusted profit before tax rose 22.1% to €8.6m from €7.0m the year before. The average number of consultants on the company's books rose to 1,483 in the second half of 2010 from 1,153 in the second half of 2009, while billable days per consultant on an annualised basis rose to 187 from 181 in the second half of 2009, well up from a recent nadir of 175 in the first half of 2009 when the company's customers were exercising caution as they came out of the recession.Experienced consultants are becoming harder to find, van Megen conceded, but the company is taking on plenty of graduates and young professionals and ramping up its internal talent development programmes. Chief financial officer René Gawron said the figures demonstrated "the turnaround we have achieved, returning to be a growth company in 2010"."We have a lot of momentum as we leave the recession behind. Investment in headcount have begun to pay off," claimed van Megen.There has been some comment in the broking community about margin growth not keeping pace with top line growth, but Gawron explained this was due to the start-up costs associated with the company's strategic move into managed services - a "long cycle" business where the company could realistically expect to enjoy 10 years or more of recurring revenues from supporting a product it has helped a customer to design and install."Services businesses have above average gross margins after the first year or so," Gawron said. "There is a drag on margins and cash flow in the first year because of the costs of training and placing staff, and so on."Net debt, at €4.5m at the end of 2010, was also higher than some analysts had been expecting, and though this was down on the €6.2m of debt at the half-year stage, the company had ended the previous year with net cash of €1.6m.This, too, Gawron attributed to the nascent managed services businesses, which is soaking up a lot of working capital at present. "Trade receivables are tying up working capital; this is the nature of a growing business," Gawron claimed.The chief executive, van Megen, sounded sanguine about the situation, observing that if the year-end had been five days later SQS would have ended with a positive cash balance, as a big payment from Deutsche Bank arrived in its coffers early in the neww year.The company is keen on expanding in managed services because it provides greater earnings visibility than the company's software testing business. The managed services business contributed more than €50m to revenue in 2010 and has helped increase brand awareness."Without wishing to sound arrogant, we are clear leaders in the software testing market in Europe but in managed services, we are going up against the big boys, companies such as IBM, Cap Gemini, Accenture and Logica. Every contract we win helps us win the next one," van Megen said.Having rebounded strongly in 2010, the current year looks to be one of consolidation, with the management saying it is "confident of similar performance in 2011".The full year dividend has been increased to €0.08 from €0.07 the year before, consistent with the company's policy of paying out around 30% of retained earnings to shareholders.