Challenging qtr for product & cloud biz: Polaris

Arun Jain, chairman & CEO, Polaris, says that both product and cloud business had a challenging quarter and the cloud business incurred a loss of Rs 20 crore in this quarter. The company has witnessed a slowdown in America and Europe and some deals got delayed.

Also read: PSUs, cyclicals next key in earnings run: Motilal Oswal 

Below is the edited transcript of his interview to CNBC-TV18.

Q: Polaris reported disappointing set of numbers this quarter and the company will end the year quite flat, way below what the industry will achieve. What is going wrong? How much longer will you take to turn things around?

A: This was a challenging quarter. The product business has impacted revenue and in the cloud business we incurred a loss of Rs 20 crore in single quarter. The services business reported a healthy margin of 21 percent and EBITDA is also good. We have three different businesses - services, product and cloud, which have a very different investment profile and we need to fund them differently.

Each business has the potential to grow separately, but in common context what investor perceives is very different. In cloud business we incurred a loss of Rs 20 crore, but it is not sufficient to compete in global marketplace in the cloud business which is the next growth business in the world of financial technology. We are facing these dilemmas and investors and analysts are unable to understand our portfolio. So, the board took a different call yesterday.

Q: Is there a lingering problem that has been running through this financial year that you see trickling into Q4 as well? How much confidence do you have in this reworked guidance that you are putting up? Is it a situation under flux or have you resolved issues by the end of Q3?

A: There are no issues as far as the market. European and American markets were slow in the third quarter on financial technologies, so some decisions got delayed after hurricane Sandy, almost four weeks on the Wall Street were lost where the decision making process slowed down. We are confident of growing all the three businesses aggressively and for us the challenge would be how do we fund all the three businesses and meet the investor expectations.

Q: I think you mentioned that the board has taken a call that maybe the whole organization needs to be restructured and looked at diffidently. Are you hinting then that it is following that the products, services and cloud business might now be split up into separate entities?

A: It's too early to come to a conclusion. We can grow aggressively if we can scale up all the three businesses but for that we need a different funding. Till now, we were using internal accruals but the board feels for these businesses to grow alternate funding would be required. We need to explore all the opportunities that are available in the market place. We have a world beating product which can dominate that space completely.

Today Indian investors feel that 15 percent investment in sales and marketing is high whereas the US investors invest around 40 percent. Pegasystems or any other product companies invest up to 40-45 percent in sales and marketing. There are different levels of benchmarking. It requires different kind of modelling, investment and appetite.

Now, I have received a mandate yesterday and I will work with the management team and the consultant to see what best possibilities can be worked to aggressively grow our businesses.

Q: You virtually mean that because one business is an investment face and the other is a regular cash generator, the service business, bread and butter you would want to separate the two. A demerger seems like the way that you are looking at the way forward?

A: All the options are open. Definitely, your point is one interpretation and could be a possibility. We will study what options are available to us once the BCG consulting study is completed. We like to consult more and see each business, what is the value each business is bringing up for the customers and how can we structure them.

Q: You have talked about some of these moves in the past. Earlier it was about monetization, unlocking of assets, now you are looking at strategic options. Can you set out some kind of timeline for your shareholders in terms of how soon you want to do this and what enterprise value you attach to both these verticals?

A: When we look at the investment profiles of various product companies like Work Bay or Fun Tech their investment profiles are very different and this time the board has taken a conscious decision to appoint an agency to understand the untapped potential available in Polaris. What kind of transformational project we are involved in with our customers? How much value we added for the customers in services business? What value we added in project like Reserve Bank of India (RBI) or what value we added in terms of the clouds business? So once they look at it they found there is a huge undiscovered value lying there and if we keep it together there is a problem. With the next board meeting we will go back to them with our proposals.

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Q: What kind of rough enterprise value that is being suggested by the people looking at your products right now?

A: As of now it is not about the value, it is about what we can contribute to the marketplace? How do we dominate the market and create more value for the customer? As of now, customer is first and secondly if we create value for customer the enterprise value will be outcome of what value we create for the customer and for that we need different investments.

Q: The fact that the product business needs a lot of investments and that phase is taken, but it also appears that your product business lost some momentum in the current quarter. Licence revenues were not booked adequately. Some deals were not closed. Are you sure that as you talk about more investments you are not beginning to lose momentum in your products business?

A: Not really. Our investment in product business in sales and marketing is still much lower than the market needs for closing such kind of a profile. So our sales team needs a facelift and a global sales profile. We need to invest close to additional USD 10 million to enhance our sales profile that cannot come out if we are constantly look q-o-q results and satisfying the needs of an investor who has the predictability of service business and he knows all the metrics of service business to be compared with Polaris metrics. So that is a critical dilemma.

There are some investors who want to invest in a service company which has more predictability. Some of the investors may have high risk appetite and high returns. So I think we need to look at what can we do to ensure that we fund them appropriately rather than leave them half invested companies.

Q: How does next year looking like? Do you think by FY14 you would resolve your problems, restructured the company and get back on course or do you think it will take longer than that?

A: No, this is the right time to do it, because feedback from the customer is very good. So FY14 looks healthy. All three businesses have great scope of growth. What we invested in last six years will come to fruition in next year. So this we are calling a journey of 4.0 which we are embarking on this time.

Q: I believe there was a major deal that got postponed on the product side and that may not even come in FY14. Can you just put a number to what your deal pipeline looks like right now?

A: Deal pipeline totally stands at USD 850 million. We do not have any concern on deal pipeline. A deal worth USD 100 million from European banks for transformational projects got delayed due to last minute management change. Our product is not losing the steam it has potential. Our next generation technology is being like by our clients significantly in Europe and America. It is a question of face-lifting our organization which is suited rightly for services, product and cloud business.

Q: Your heart seems to be in the product business. Would you even consider selling off the service business? You are not of the size and scale of the larger companies in the in the service space. If in three months time a demerger were to happen I can imagine people wanting your product business, but why would one want a very small service business compared to the biggies in the market. Would you consider selling that off and staying and concentrating on products and cloud?

A: A customer is looking for solution which a company like Polaris who has a strong knowledge depository which delivers huge operational productivity in service business can deliver. The service business is moving towards business outcome driven business and for it you need intellectual property.

For a simple outsourcing one require process depository, it may not be knowledge depository or domain depository. Our domain depository is heavy with us and we are picking for those large deals like last quarter we have won a USD 25 million deal with one of the global client is basically because of domain expertise. So it is not that service business is not a growth business. All the three businesses require different management teams and different investment profile.