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A mixed quarter with weak revenue growth, but stronger than expected
operating margins. Persistent Systems reported 2QFY12 revenues of $51.5
million, with modest Q/Q growth of 3.1% (despite contribution from Agilent
acquisition), which is weak in our view. Management attributed the weakness to
volatile macro environment because of which renewal of larger deals is getting
delayed. The company maintained FY12 revenue guidance of $220 mn but with
low confidence (we estimate lower revenues than $220 mn). We trim our US$
revenue estimates, but this is offset by the benefits of weaker INR.
Margins came in ahead of our expectation at 13.2%, up 90 bps Q/Q despite
salary hikes’ headwind of 230 bps. The margins expansion was primarily due
to currency tailwinds, pyramid (fresher hiring) and higher revenues from IP led
initiatives. We expect margins to expand further in 3QFY12 primarily due to
currency benefits (we model INR/USD at 48.5 for 3QFY12 vs. 2QFY12
average of 46.2).
Persistent's sales and marketing expenses declined to 7.0% of sales (from 7.8%
in 1QFY12) because the company is in the process of realigning its sales effort
in order to focus on four thrust areas (cloud, mobility, analytics and
collaboration). Moreover, the company plans to leverage its sell-with
relationships better, which should help to rationalize S&M expenses.
Business model undergoing an evolutionary change. Despite volatility in
quarterly performance (partly due to the project-based nature of its
assignments), Persistent’s business model increasingly rests on a strategy that
combines (a) sell-with partners in joint go-to-market models, (b) the 4 themes
of cloud, analytics, collaboration and mobility, (c) small acquisitions that fill
product niches in various verticals, (d) IP-based revenues, and (e) greater use of
technology consultants to help mine client relationships. This gives breadth to
the business model, but we believe Persistent also needs to work on depth.
Remain OW on reasonable valuations. We increase our FY12EPS by 16% to
account for margin expansion due to currency tailwinds, while our FY13 EPS is
unchanged. We remain OW due to valuation, which is attractive at 9x FY13E
EPS. We expect Persistent to trade at 11x one year forward EPS (down from
12x because of weaker US$ revenue growth than before), from which we derive
our Mar-12 price target of Rs.390 (earlier Rs.430).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A mixed quarter with weak revenue growth, but stronger than expected
operating margins. Persistent Systems reported 2QFY12 revenues of $51.5
million, with modest Q/Q growth of 3.1% (despite contribution from Agilent
acquisition), which is weak in our view. Management attributed the weakness to
volatile macro environment because of which renewal of larger deals is getting
delayed. The company maintained FY12 revenue guidance of $220 mn but with
low confidence (we estimate lower revenues than $220 mn). We trim our US$
revenue estimates, but this is offset by the benefits of weaker INR.
Margins came in ahead of our expectation at 13.2%, up 90 bps Q/Q despite
salary hikes’ headwind of 230 bps. The margins expansion was primarily due
to currency tailwinds, pyramid (fresher hiring) and higher revenues from IP led
initiatives. We expect margins to expand further in 3QFY12 primarily due to
currency benefits (we model INR/USD at 48.5 for 3QFY12 vs. 2QFY12
average of 46.2).
Persistent's sales and marketing expenses declined to 7.0% of sales (from 7.8%
in 1QFY12) because the company is in the process of realigning its sales effort
in order to focus on four thrust areas (cloud, mobility, analytics and
collaboration). Moreover, the company plans to leverage its sell-with
relationships better, which should help to rationalize S&M expenses.
Business model undergoing an evolutionary change. Despite volatility in
quarterly performance (partly due to the project-based nature of its
assignments), Persistent’s business model increasingly rests on a strategy that
combines (a) sell-with partners in joint go-to-market models, (b) the 4 themes
of cloud, analytics, collaboration and mobility, (c) small acquisitions that fill
product niches in various verticals, (d) IP-based revenues, and (e) greater use of
technology consultants to help mine client relationships. This gives breadth to
the business model, but we believe Persistent also needs to work on depth.
Remain OW on reasonable valuations. We increase our FY12EPS by 16% to
account for margin expansion due to currency tailwinds, while our FY13 EPS is
unchanged. We remain OW due to valuation, which is attractive at 9x FY13E
EPS. We expect Persistent to trade at 11x one year forward EPS (down from
12x because of weaker US$ revenue growth than before), from which we derive
our Mar-12 price target of Rs.390 (earlier Rs.430).
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