SQS expects medium-term improvement in operating margins

Software Quality Systems announced Monday that trading for the first half has been in line with management's expectations, adding that new products from its consulting arm were expected to deliver improved EBIT margins over the medium-term.

In a trading update for the six months to 30 June, management highlighted how its business was in constant evolution in order to respond the increased digitalisation across all its clients.

First half revenues were expected to be on a par with those from the backhalf of 2016 at approximately €160.4m, albeit slightly lower than the comparative period's €166.6m.

Meanwhile, the company's adjusted EBIT margin increased to 7.5% from 6.9% over that same time frame, thanks to a continued focus on cost management and increasingly "automated and efficient ways of delivering our services".

Adjusted EBIT was also forecast to reach approximately €12.0m over the first half, an increase of 4.8% on the same period last year and reversing the downward trend seen in H2 2016.

In light of these forecasts, analysts at Cannacord edged up their fiscal year 2017 EBIT forecast for the company from €24.5m to €25.0m while reiterating their 'buy' recommendation and 620p target price on its shares.

SQS endured one banking client loss of €7.0m.

Over the medium-term, SQS said it expected to be able to reach an adjusted EBIT margin of "at least" 9% organically, with the corresponding operating cash flow improvements.

The company currently has a stronger pipeline than in 2016 and is well placed to benefit from a range of emerging growth opportunities in what is a very exciting market, Cannacord said.

Looking ahead, SQS said it expected second half 2017 revenues to be slightly above those in the first half with a number of known business wins starting later in the year.

Dik Vos, CEO of SQS commented: "It has been a period of progress across the business as we see increasing demand for our digital change offerings. As the quality assurance market continues to evolve and seeks a more industrialised automated approach, SQS is in a sweet-spot of the evolving market dynamics.

"We are delighted to have added additional blue-chip brands to our customer base this year, indicating increased presence and credentials to support medium-term growth. This is across our key verticals, but is especially evident in the technology and automotive sectors".