Persistent Systems Q4FY17 Concall Summary

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Overall Revenue Numbers

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  • Dollar revenue for Q4 FY17 stood at $109.03mn showing a 0.9% q-o-q dip and 8.6% y-o-y growth
  • Dollar revenue for FY17 stood at $429.01mn showing a 22 % y-o-y growth
  • INR revenue for FY17 stood at INR 28,784.39mn showing a 24.5% y-o-y growth
  • Linear revenue grew by 0.3% q-o-q, driven by 1.1% growthin average blended billing rate, however volumes declined by 0.8%
  • Offshore linear revenue dipped by 1.6% q-o-q, due to 1.3% volume decline and a dip of 0.3% in the billing rate
  • Onsite linear revenue grew by 3.5% q-o-q, driven by 2.1% volume growth and a 1.4% increase in billing rate 
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  • EBITDA margin for Q4 FY17 was 16.3% compared to 15.9% in Q3 FY17 and 15.8% for FY17
  • Two major factors that have impacted the EBITDA margin are:
  • Appreciation in Rupee by 1.6% impacting EBITDA by 50bps
  • One-time expense in the form of an out-of-court settlement which impacted margin by 160bps. This is related to rCloud product of Accelerite business and is shown as an exceptional item in the financials(INR 114mn). As rCloud contributes marginally to revenue, the company has decided to move out of this product
  • G&A and S&M expenses were lower in Q4and good recovery of receivables from customers also helped the margins
  • D&A in Q4 was at 5.4% of revenue in Q4 compared to Q3, which was5.2% of revenue
  • EBIT margin for Q4was 10.9% as against 10.7% in Q3
  • Treasury income was INR 171mn in Q4 vs INR 143mn in Q3. The exchange loss in Q4 was at INR 28mn due to rupee appreciation, against a gain of INR 174mn in Q3
  • PBT margin was 12.9% (INR 937mn) in Q4compared to 15% (INR 1,118mn) in Q3
  • ETR for Q4 was lower at 22.3% due to lower tax in overseas subsidiary while for entire FY17, the ETR was 24.8% which was same as FY16
  • PAT margin was 10% (INR 728mn) in Q4, compared to 11% in Q3 and for entire FY17, it was 10.5%(INR 3,015mn) at 1.4% y-o-y growth
  • In FY18, margins are expected to improve with higher revenue growth in high margin digital and IP-led businesses and marginal improvements q-o-q in Services business 

Other Important Financial Information:

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  • Operational Capital Expenditure for Q4 was INR 187mn
  • Cash and investments at the end of Q4 were at INR 9,180mn compared to INR 8,820mn at the end of Q3
  • The company may use this cash balance in future for acquisitions in digital and IoT space
  • Value of forward contracts outstanding at the end of Q4 was $90mn at an average forward rate of INR 70.67/$
  • The board has recommended a final dividend of INR 3/share which along with the interim dividend of INR 6/share adding to total dividend of INR 9/share for the year compared to INR 8/share in FY16
  • The dividend pay-out ratio was 28.7%
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 Services Business:

  •  Q4 revenues were 1% down q-o-q at $47.87mn
  • The company is strategically trying to achieve 80% of the business from targeted customers

Non-Services Businesses:

  • Digital business revenue in Q4 stood a $20.67 mn, growing by 11.1% q-o-q and the for FY17, y-o-y growth has been >50%
  • The growth could have been better but some last-minute deals got pushed into next quarter
  • The company signed few large new fortune 500 companies in the quarter and 2 large ones of them are:
    • Boston based Partners Health Care
    • USAA, the bank for 14 million US military and paramilitary personnel – it opened up cyber security opportunities not just for banking verticals but also other verticals where the application can extended to
  • The company has built a strategy to establish itself as a leader in the healthcare and is also seeing good traction in financial services
  • IBM Alliance business in Q4 stood at $30.14mnwith a 10% dip q-o-q, however the dip was anticipated and n FY18, the company expects a double digit growth
  • There is a very robust pipeline on the IoT businessas the companyexpects to generate positive growth and set up a verystrong positioning in the IoT market for FY18
  • According to the deal signed last year, there was a commitment to employ only certain number of people, which resulted in an overall shortfall of $8-10mn. The company also looks to overcome these profitability problems by adjustments in terms of growth on other revenuesand also reduction of cost by redeploying resources from higher cost locations to some of the servicesopportunities
  • Lab services revenue stream has not been big so far, but the company has signed few entry level deals with some auto industry consumers which should give a boost
  • The company also signed a product called NPI through IBM which would be resold through IBM
  • One problem, the company sees with IoTbusiness is that, monetization potential for these devices is limited, as the real revenue opportunities come out only when the customer has made $20-30bn saving because ofIoT, which would take 2-3 years. However, being one of the first movers, the company is at an advantage
  • In IoT business, the company is primarily targeting Healthcare, BFS and Industrials verticals
  • Accelerite business in Q4 stood at $10.35mn with a 7.7% growth q-o-q
  • 2 new products Sentient and Concert have been launched in Q4 and the company is very optimistic about the revenues from these products in FY18
  • The company has also added ShareInsights and someother IPs
  • IP-led revenue in FY17 contributed to ~28% of the business and is expected to show good growth in FY18 with many partnerships

 Other Key Highlights:

  • Inaugurated new development centers in Riley,Guadalajara (Mexico), and Rehovot (Israel). These have been setup as aconsequence of IBM IoT partnership with some people working in IBM locations moved into the company’s own locations
  • Smart IndiaHackathon 2017 was organized in conjunction with All India Council of Technical Education under the aegis of theMinistry of HRD. 1,250 teams with ~10,000 students participated in this 36-hour hackathon