Persistent Systems has issued a profit warning for the first quarter this year in the light of its stressed IP business and client specific issues. Speaking to CNBC-TV18 Mritunjay Singh, ED and COO of Persistent says he expects the issues faced in Q1 like visa costs and wage hike to not spill over in Q2 this year.
Persistent is targeting to maintain its profit before tax (PBT) margins at 18-20 percent this year by a strategy shift. The company will now sell its products to enterprise instead of independent software vendor (ISV) clients, he said. Singh is confident of growing contribution of its enterprise business over 24 percent this year by this move.
The company has cut its investment in selling, general and administrative (SG&A) expenses and is looking to expanding products for enterprise use through acquisitions, he added.
Below is the edited transcript of Mritunjay Singh’s interview with Sumaira Abidi and Reema Tendulkar on CNBC-TV18.
Reema: How severe is this client specific issue that the company is facing because even in Q4 your performance was impacted and how many more quarter will it spill over into?
A: The client specific issue that we talked about last quarter is fully behind us. This is the quarter in which we had a significant impact. I don’t anticipate that to continue as we go forward, so that is why when we look at this we said we must give you a warning about where we are. We also had another issue which came up in particular IP kind of a business.
As we keep saying that IP is a very lumpy business and it will continue to be lumpy every quarter-to-quarter (QoQ) basis. In this quarter it so happened that the IP revenue for our specific large clients that we had, took a little more time to close. Going forward we think it is going to stabilise and we should do well for the year.
Sumaira: This client issue is not the same as what we had faced in Q4 which was in your Independent Software Vendor (ISVs) the pressure in this quarter you say is in the IP segment is it?
A: These are two different things. We had said that there is a client specific issue and there is a bit of spillover of that in this quarter. We anticipated a much bigger damage but we could contain a little bit and there is some which happened this quarter. So there is a bit of impact of that on an IP business. So that is why we see an IP number little bit of stressed this quarter. So combination of the two is why we have put out this warning.
Reema: You are confident that neither of these two issues will spillover in to the next quarter?
A: No, we don’t think so.
Sumaira: Now that your Q1 base is lower, the asking rate for Q2-Q4 is a lot higher so how will growth in FY16 pan out?
A: We are absolutely confident that FY16 growth will be better than last year. One thing which we would like to explain is we are shifting our strategy. We used to sell primarily to ISV clients and now we are selling lot more too enterprises. Our last quarter we announced that the enterprise revenue was 24 percent roughly of our total revenue. We already see that number going up this quarter. It is tracking much higher than 44 percent. So we are confident that this shift will compensate in making these numbers.
Reema: You also spoke about how increased investments into the company will hurt your margins in the near term. Can you give us some numbers? For instance in FY15 your selling, general and administration (SG&A) spends was close to about 19.50 percent how much will it rise to this year?
A: So SG&A investment is fully done I don’t expect that number to go up. It will be in that ballpark right now. Currently investment is being made for the enterprise shift that we talked about the strategy. I don’t anticipate more investment in that. We have set for the year that we will maintain a margin of around 18-20 percent. For a year we are confident that we will be able to manage that margin.
Sumaira: How much could be the pressure on your margins in Q1 and Q2 because of wage hikes plus the visa cost?
A: Q1 and Q2 there is seasonality to it. Q1 usually is of all the visa cost that gets loaded on the books and Q2 is when we do the wage hike but overall for the year we are confident that we will be able to manage our margin.
Reema: Just a clarification these 18-20 percent margins that you referred to are PBT margins right?
A: Yes.
Sumaira: Could you give us a few details about this, the new acquisition of Convinture, the total spends as well as the revenues?
A: It is a very small business. What we have done is we had a business around Disaster Recovery on cloud called rCloud and we wanted to add capability to do this for large enterprises. So we acquired this company which can help us do that. It is not a very large deal; we are primarily paying out of accrual so it is not going to be of huge impact to the topline. But it is a move avert strategic in terms of expanding our products to offer for the enterprises.
Reema: Are there anymore acquisitions of IP that you are considering? What is the pipeline looking like?
A: We have a very robust pipeline of acquisitions that we are tracking right now. There are some at early stages; unfortunately we cannot talk about it. However, pipeline is extremely solid we expect to close couple of them in next few weeks. We are getting into a silent period in another couple of days so maybe the announcement will come only when we are done with the silent period which is towards end of next month.
Sumaira: So Persistent has now started sharing the breakup of revenue by industry classification that is ISV enterprises as well as IP lead. Could you tell us what will be the growth in each of these segments?
A: Most of the growth that we expect is to come from IP and the enterprise segment. ISV business will be little bit of growth but not as much as enterprise in the IP business and that is why we are confident that overall as a company we will be able to do better than that. We keep saying that the ISV business the pre-cloud companies for last 6 months have been revisiting this strategy.
Most of them have done with their strategy, they have done the new structuring and now they have figured out how to spend that money but that doesn’t impact for last 6 months but going forward we think that spend is going to open up. If you look at all the large players all of them have gone through a stage of trying to reach re-strategise how they will play in to this cloud device market so they are done with that strategising part.
Now it is a question of us being able to be a partner with them and add value so that business will continue to grow but it won’t continue to grow at like 30-40 percent.
Reema: What would be the total spend on your acquisitions because you indicated that you have a robust pipeline of acquisitions?
A: It is very hard to put a number they are various sizes, there are small businesses and there are large businesses. They are in the range of USD between 5 and 50 million kind of businesses. It is very difficult to pout a number right now which one, we will close because we are chasing multiple of them. However, we think that very in next 4-6 weeks we will be able to close a few.
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