Persistent Systems is expected to clock ‘muted’ growth this quarter, a development that will likely result in the company missing its full-year dollar revenue growth target of 15 percent, founder and CMD Anand Deshpande told CNBC-TV18’s Latha Venkatesh and Sonia Shenoy in an interview.
The MD’s comments came soon after the company released a statement to the exchanges attributing the expected weakness to “a change in the business priorities of one of our large customers in the product engineering segment”.
Given how it had fared in the first three quarters of the year, Persistent had an asking rate of 10 percent sequential growth in the fourth if it were to meet its FY15 guidance and as late as during the third quarter earnings, it had stuck to its forecast.
But Deshpande said the change was a one-off, thanks to the due to technological changes taking place in areas such as cloud and analytics. He added that the weakness was unlikely to persist into the next quarter or year.
“The new strategies they [customers] are pursuing deeply align with us. There is lots of activity taking place in the digital transmission space. We expect new business next year,” he said.
Persistent shares were down 1.8 percent in early Mumbai trading.
Below is the transcript of the interview on CNBC-TV18.
Sonia: Can you tell us what exactly the concerns are and why the company’s margins and revenue could be under pressure?
A: The guidance essentially what we find is that in every quarter we have many of our existing customer business that goes down and new ones come up. During this quarter we have seen little bit of higher dips in the customer accounts that we have been having amongst the existing accounts. So, there is pressure on the topline and that might relate into bottomline also.
So, there is still two more weeks to go so the exact numbers hard to tell. However, we have had a couple of larger customers who have changed their business priorities during the last week or so, so, we thought it would be best to pre-announce this rather than wait for the end of the quarter.
Latha: Our analyst tells us that you had guided for 15 percent growth in FY15 and to achieve that you will have to do 10 percent in Q4. Is that under a cloud now?
A: If the growth is muted it won’t meet the 10 percent.
Latha: Would you want to guide to another then?
A: I don’t want to in a sense right now because there are still two weeks to go before the quarter. All we are saying is that this quarter’s growth will be muted and part of the reason is partly because of some of the existing accounts where we have had relationships where the customers have changed their priorities and it is nothing beyond that.
We have a lot of activity going on in the digital transmission space which still continues to be very bullish and we do expect some new business to come in even this quarter and for the next year. I don’t see this as a long-term trend in anyway but we did give an earlier an indication of 15 percent growth which is going to be not possible this time.
Latha: Will the shadows also cast themselves on the Q1 of next year?
A: I wouldn’t expect that. People are changing priorities; they are also changing them in favour of doing more work with us so some of that is also happening. The challenges are between these changes. So shift caused us temporary glitches in the way the projects are getting executed and that is what causes some of these problems. There are a lot of changes happening in the market under technology side predominantly because of these newer things like cloud and analytics and most customers are making changes in their direction in terms of how they are going.
The new stuff that they are looking at is very deeply and dearly and keenly aligned with us. So, we continue to be very optimistic on the long-term prospects of the company but every time a change like this happens it causes the existing teams to change their direction and hence there are gaps in between project finishing and new project starting now.
Sonia: You did mention that you will not be able to meet your FY15 revenue guidance. What about your profit before tax (PBT) guidance of 20 percent, will you be able to manage that or given that you have higher R&D spends that will not make it through?
A: I don’t know yet, it is still too early. When we look at profit after tax (PAT) and PBT numbers, those come in much later than that. We still think we will be near there but I don’t want to say a specific point on that one because some of the impact of exactly what these changes are and how much of the new business will we get immediately, it is all sort of not clear yet.
Sonia: Can you quantify for us in anyway what the R&D and the sales & marketing (S&M) spends could be in terms of higher spends?
A: We have been trying to push our sales and marketing numbers to go up. We were at 8 percent last year. This year it has been 9-9.25 percent and the reason is we are seeing a lot of growth in the new businesses that are coming in around digital transformation. We have invested quite a bit in a technology that will help us in going to enterprises. So, the main shift that we have been doing is we have been working a lot in the independent software vendor (ISV) market which is product centric companies.
This is something that we had anticipated that because of the cloud work requirements our project sizes are going to shrink in existing accounts. We have been trying to get into the enterprise space and that is going quite well. So, there is a lot of increased investments in R&D and marketing, sales on that side which are all continuing and need to continue because of the way the market is moving and the traction we are expecting on that. However, when we were looking at that we were expecting the existing business to stay flat or keep growing which has not happened as well as we had thought during this quarter.
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