Sqs Software Quality Systems Ag is another one of those tech stocks that I've been looking at as a recurring income play. It has businesses in Germany and the UK which provide an outsourced software testing service - very much the kind of 'picks and shovels' story I liked when the internet was booming, and still do.
Apparently, up to a fifth of software projects fail, either not achieving what they were expected to, or conflicting with other systems or processes. Sometimes time constraints are responsible, sometimes departmental politics, sometimes the fact that the specifications weren't tightly enough drawn. But a 20% failure rate is obviously a concern - and one that SQS, as the largest single global player in outsourced testing [1] can address impartially.
Recent years have seen not just strong growth in testing, but also a gradual shift from software testing on a tactical level, when a problem has been identified with a new installation, to a continuous testing strategy to ensure quality control over the whole lifecycle of software and systems. SQS focuses on the values of the business - testing first those systems and processes that are business critical. That has brought it success - 50% of FTSE 100 and DAX 30 companies are clients [2] .
Independent software testing still accounts for less than 20% of the total software testing market, so there's still room for the sector to grow. And SQS has been migrating clients away from one-off testing to a managed services model, which should help create a strong recurring income stream. That underpins the long term attractions of the business.
SQS is a global company, with offices in Austria, Egypt, South Africa, the Netherlands, Norway, Sweden, Finland, India, Ireland, Switzerland and the US, as well as Germany and the UK. It's also developed a blend between onshore and offshore testing, which gives it the ability to compete on price as well as quality.
SQS looks pretty defensive, but it hasn't been completely unaffected by the economic environment. Its 2008 results were solid, showing organic growth in all divisions and an 18% growth in revenue, with 10% growth in the dividend (after allowing for a special payment in 2007, which skews the headline figures). However, May 2009 saw a profit warning, and though the interim results for 2009 were…
