Persistent Systems Q3FY17 Concall Summary

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Overall Revenue Numbers

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  • Dollar revenue for Q3 FY17 stood at $110.03mn showing a 4.9% q-o-q growth and 22.7% y-o-y growth
  • INR revenue for Q3 FY17 stood at INR 7,455mn showing a 5.9% q-o-q growth and 25.9% y-o-y growth
  • Linear revenue grew by 3.7% q-o-q, driven by 3.9% volume growth and a 0.2% dip in average blended billing rate
    • Offshore linear revenue grew by 2.5% q-o-q, driven by 3.2% volume growth and a dip of 0.7% in the billing rate
    • Onsite linear revenue grew by 5.8% q-o-q, driven by 8.5% volume growth and a 2.5% dip in billing rate(due to holiday season)

Margins

  • EBITDA margin for Q3 FY17 was 15.9% compared to 15.7% in Q2 FY17 and 15.6% for 9M FY17
  • G&A expenses were higher in Q3 due to increase in facility cost for overseas locations and increase in professional fees
  • Employee count has decreased in Q3 compared to Q2, and also with respect to campus hires, numbers have been lower as company intends to recruit people as and when required. However, utilization improved by ~4.5% as it went up from 74.2% in Q2 to 78.9% in Q3
  • Although, lesser number of billing days has impacted the margin, but it was more than offset by better profitability in the IP business which had higher revenue with lower headcount
  • S&M expenses were spread over higher revenues, offsetting the increase in G&A cost
  • D&A in Q3 was at the same level compared to Q2 at 5.2% of revenue
  • EBIT margin for Q3 was 10.7% as against 10.5% in Q2
  • Treasury income was INR 143mn in Q3 vs INR 203mn in Q2. The exchange gain in Q3 was at INR 174 mn, higher than Q2due to rupee depreciation
  • PBT margin was 15% (INR 1,118mn)in Q3 compared to 14% (INR 984mn)in Q2
  • ETR for Q3 was 26.7% and for 9M FY17, it stood at 25.5%
  • PAT margin was 11% (INR 819mn) in Q3, growing by 11.4% q-o-q and 5.7% y-o-y
  • Two major factors that have negatively impacted the marginsin Q3 are:
  1. there was a small increase in the doubtful debt provision and also
  2. a one-time credit of leave valuation in Q2 which is not there in Q3
  3. Going forward, margins are expected to improve with higher growth in high margin digital and IP-led businesses compared to Services business
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Other Important Financial Information:

  •  Operational Capital Expenditure for Q3 was INR 115mn
  •  Cash and investments at the end of Q3 were at INR 8,967mn compared to INR 8,454mn at the end of Q2
  • Value of forward contracts outstanding at the end of Q3 was $119mn at an average forward rate of INR 70.82/$
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Services Business

  • Q3 revenues were 1.6% down q-o-q, as being a linear business, revenues were impacted by leaves and holidays, which were more than anticipated
  • Major verticals - Financial Services, Telecom and Media, Life Sciences, Healthcare and the traditional ISV business
    •  Financial services has been doing pretty well and contributes to ~15.5-15.6% of the business
    • Healthcare and Life sciences has been flat, but the future holds a promise
    • Telecom and Media have been struggling, due to structural changes in the client industry
    • ISV has also been struggling a lot due to sudden ramp-down in one of the ISV clients, general cut down of budgets by many clients and trimming of small accounts. However, the pipeline looks healthy with the company chasing ~5 to 6 large clients in the past few quarters
  • Top-10 accounts haveshown good traction and were the major growth driving ones
  • The company anticipates the future growth to be close to NASSCOM’s estimate for the industry

Non-Services Businesses:

  • Digital business grew by 16.7% q-o-q and constitutes 16.7% of the business
  • IBM Alliance business grew by 8.3% q-o-q and constitutes 30.6% of the business
    • The focus was on transition in Q1 and Q2, which had been pretty smooth with proper set up of teams and delivery to customers
    • In Q3, the company started to work on deployment and implementation with realization of revenues, however most of them are billed through IBM
    • The company looks to be a long term partner with IBM
  • Accelerite business grew by 4.3% q-o-q and constitutes 8.6% of the business. It has been taking on end-of-life products and trying to see how to grow them
    • Aepona (IoT platform) and Radia (end-point client management product) have done really well
    • CloudStack has been a fairly stable business, growing at pretty small number
    • 2 new products - Sentient product and Concert product, are expected be to launched in the 2nd half of Q4 and are supposed to be the revenue generation engines
  • IP-led revenue grew by 6.9% q-o-q and 73% y-o-y
  • There was good addition of large customers in Q3, which customers include
    • A financial services group in the Middle East
    • A large US-based collectibles major
    • A US-based healthcare company
    • A US-based financial services payments processes company
    • The company has also signed partnerships with Dell Boomi, Google Cloud platform and NewSoft, alongside the existing strong partner ecosystem of Salesforce, Appian and Oracle
  • Most of the deal sizes range from $1mn to $5mn, which is the also the range, the company is looking out for in near term future
  • It has also ramped up the marketing activities

 Visa Issues

  • The company has 47-48% local U.S. people as employees and the rest as a combination of H1Bs and L1s. So, the rule of 50% local hires might not affect much. Also, acquisitions of teams from IBM, Intel, HP etc., have helped the in creating a local workforce. It has also set-up a center in Columbus to hire locally and build a team locally out there
  • Also, most of the H1B people are paid nearly $100K or more. So, they are not usually affected. However, if everyone who is less than $100K has to be paid more than $100K, the total impact of that would be $1.5-$2mn per year

 Other Key Highlights

  • Recognized as Salesforce Platinum Consulting Partner, a reflection of our growing strength in the Salesforce ecosystem.
  • Named by IBM as the Worldwide Watson Internet of Things Innovative Business Partner of the Year
  • Working on a project with the Bio-complexity Institute of Virginia Tech, which won the Constellation Research Super Nova Award for ‘Data to Decisions’ Category
  • Cited as a leader amongst the BPM Service Provider in the Forrester Wave for BPM Service Providers in the Q4 2016 Report
  • Positioned as a leader in Product Engineering Services for Enterprise Software and Consumer Software
  • Plans to organize a Smart India Hackathon 2017 towards the end of March for which, participation from 6,700 technical institutions and 25 government departments across India is expected

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