MOSL: PERSISTENT SYSTEMS (Buy)-Operating beat led by IP revenues; offsets Digital blip
Persistent Systems: Operating beat led by IP revenues; offsets Digital blip
(PSYS IN, Mkt Cap USD1b, CMP INR826, TP INR950, 15% Upside, Buy)
- Revenue beat, but Services and IP contrasted expectations: PSYS’ 1QFY19 revenue grew 5.7% QoQ (est. of +4%) to USD124m. Services revenue (73% of total) declined 1.2% QoQ, missing our estimate of +3.9%. The decline would be lower adjusted for some reclassification (USD1.2-1.5m impact). Within Services, the high flying Digital declined 5.8% QoQ. On the other hand, IP-led revenue surprised positively, with sharp 30% QoQ growth, above our estimate by +26%. This was led by USD6m from IBM CE-CLM resale licenses, whereby PSYS’ European investments started to pay off.
- EBITDA margin exceeds but gross margin misses estimate: Gross margin expanded 100bp QoQ to 35.6%, but was 50bp below our estimate. This was in part due to resale of IP revenue which had proportionate purchase costs. EBITDA margin at 16.8% (+200bp QoQ), however, was above our estimate of 16.3% (SGA optimization). PAT grew 18.5% QoQ to INR873.5m (below est. of INR931m) due to lower forex gains and a higher tax rate.
- Commentary healthy on multiple fronts: PSYS cited the decline in 1Q Digital services revenue as a blip, and given the pipeline, deal wins and robust demand, this should bounce back in 2Q. Accelerite too should see higher revenue driven by Neuro, Share Insights and Sentient. Even for the margins, PSYS expects ~80-100bp operational improvement YoY in FY19 (ex. currency, which may add another 50-100bp). Our overall revenue and earnings numbers are marginally changed post the results. FY19 EPS is down 5%, mainly on account of adjustments in other income and forex after 1Q.
Persistent Systems Limited is engaged in the business of building software products. The Company offers complete product life cycle services. The Company's segments include Infrastructure and Systems, Telecom and Wireless, Life science and Healthcare, and Financial Services. The Company's products include Connected Healthcare, which is an integrated healthcare ecosystem; ShareInsights Platform, which allows organizations to analyze an overlay of enterprise data with public or cloud sources to derive insights; Digital Banking, and Accelerite, which provides cloud solutions, endpoint management and mobility. The Company provides product engineering services, platform-based solutions and Internet protocol (IP)-based software products to its global customers. It has presence in North America, Europe and Rest of the World. Its subsidiaries include Persistent Systems France S.A.S., Persistent Systems Malaysia Sdn. Bhd. and Persistent Systems Pte. Ltd.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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