MOSL: PERSISTENT SYSTEMS (Buy)-IP drags as expected-Margin beat-High hopes, but limited visibility

PERSISTENT SYSTEMS: IP drags as expected; Margin beat; High hopes, but limited visibility

(PSYS IN, Mkt Cap USD0.9b, CMP INR726, TP INR860, 18% Upside, Buy)

• Weak revenues as expected; margin beat: PSYS reported weak revenue (-4.6% QoQ), which was as expected based on the update of IP revenue decline shared by the company toward the end of the quarter. EBITDA margin of 14.8% (-260bp QoQ), however, was above our estimate of 12.7% (-470bp QoQ), as IP decline was ~USD1m lower, headcount declined again and there were some write-backs for bonus provided for in the earlier quarters. The margin beat was offset by lower-than-expected other income, limiting the beat on PAT.
• IP weak; linear services surprise: IP revenue declined USD6.8m QoQ to USD26m (21% of revenue) v/s our estimate of USD25m on account of softness in two of the IPs with the top customer (Alliance). IP-led revenues in Accelerite, too, were weak due to softness in location-based IP, and winding up of rCloud. Services revenue grew 1.3% QoQ to USD91m, as three projects in Digital came to an end during the quarter. Linear Services, however, continued to put up a sanguine show (up 3.6% QoQ to USD53m), despite the commentary of a flattish trajectory.
• Commentary mixed - high hopes, but less visibility: PSYS's reiterated its expectation of above industry growth, as it expects revenues to remain unaltered despite 4Q miss. On margins, too, PSYS cited that it can continue holding on to the 15-16% band. While investment in sales will be elevated, those in product development will cool off, providing an offset. That said, PSYS cited that the project nature of Digital and dependency on partner's sales in IP limit visibility to predict growth.