IBM alliance has contributed to both top line and bottom line: Anand Deshpande, Persistent Systems

Persistent Systems has made some good investments in both IP and also in some internal products that we have built, says Anand Deshpande, MD & CEO. In an interview with ET Now, Deshpande states that a lot of buying is expected in the market. Edited excerpts:

ET Now: In Q4 you touched about $100 million quarterly revenue milestone. What were the other key takeaways for Q4?

Anand Deshpande: We ended Q4 with Rs 677 crore, which is a 14.4% Q on Q rupee growth. The other major milestone was that we crossed $100 million for the first time and during the quarter, which is a 12% Q on Q growth.

On annual terms the total growth was 351.65 million US dollars, which was a 14% growth. In rupee terms that was Rs 2,312 crore, which was a 23.3% growth.

If you look at the growth numbers, we had guided the market about month and a half back about IBM IoT alliance that we had done which would contribute to about 15% of our revenue. Part of it was included in this quarter, and that is the reason why you will see a significant growth Q on Q in dollar terms.

We expect this kind of revenue uptick from that particular project or the alliance to continue throughout the year. We do expect that our top line growth for the year should be pretty good. If you look at the profit numbers for this quarter, you would see that the PAT has gone up to Rs 80.8 crore, which is a 4.3% growth quarter on quarter.

Relative to top line the PAT has not grown as much and the reason again is because of this IBM IoT alliance. We had mentioned to the street as well that there is going to be a 200 bps or 2% challenge on the profit margins because of this deal. That is another factor that has played in. We expect a similar trend to continue throughout the year.

ET Now: In Q4 it is mostly IP that bolstered growth. Thanks to IBM Watson deal, services volumes was flat as was ISV, which accounts for a good 46% of your revenues. What is the demand outlook across segments? Do you see a similar 14% dollar revenue growth in FY17 coming in as well?

Anand Deshpande: Overall, we are seeing good activity in the market, though there are challenges. Many of our ISV customers are under a lot of pressure at the moment which is causing some volatility on our quarter on quarter numbers as such.

The market is looking at the next generation of transformational software. We are seeing growth more and more on the enterprise side. Some of the technology that we have put together is starting to become very relevant. More and more business is starting to become digital and SMAC is all over the place now.

We do not think it is anything separate or new anymore, but it is very much part of it. For next year we are starting to see a lot of activity around the IoT, alliance that we have done. We are planning to go together on many projects together with IBM in terms of deployment and professional services.

That should also help in increasing our footprint in the next generation digital IoT and the new areas that are happening. So overall we should have a year on year growth very similar to this year, and there is an addition to that. We have an upside that we should get from the IBM IoT alliance.

ET Now: You had guided that the IBM Watson deal would add to top line and bottom line and it could impact margins by about 200 bps. Last quarter the dip was about 3%. What are the other headwinds which you are doing?

Anand Deshpande: The IBM alliance has contributed to both the top line and the bottom line, so we see the growth on top line also through IBM, and also the bottom line margin hit has been contributed by the IBM alliance.

If you look at it the revenue numbers that we get from IBM are IP dependent in the sense that they are dependent on the sales of that product. Hence you will see volatility on a quarter on quarter basis and to some extent that will align to IBM's relative percentage of what they do on a quarter on quarter basis.

The numbers we have are from the first quarter for IBM. So you will see improvement on them as the quarter progresses in line with what IBM sells. That is how the profit should improve on the quarter on quarter basis. The market is in transition. There are lots of changes happening in the market. We do see a lot of buying happening in the market, and customers are looking at next generation transformational software.

We have made some good investments in both IP and also in some internal products that we have built. We think that this should help us in the long term and definitely in this year as well.

ET Now: How does your order book stack up and what is in the pipeline over the next couple of quarters?

Anand Deshpande: It is hard to share those levels of detail, but if you look at this quarter, we had several other strategic deals that we announced during the press release. I think the deal pipeline overall is pretty good.

There are a lot of things that we have done during this year which sets up for the next year. It is very hard to project exactly what that will result into in the next two-three quarters. But you know some of the trends if you look at in the market. We are very much in the thick of the action as you can see.

It is quite exciting and it is going to be a lot of work this year to position ourselves and move along with the winds as we see them.

ET Now: What about growth? Will that be front-ended or balanced across quarters and will profit growth continue to trail volume and top line growth?

Anand Deshpande: I do not want to say that it is going to frontloaded because that would mean that it will not have growth in the second half, that is not the case actually. We are seeing consistent growth across so if you look at year on year numbers, quarter on quarter you should see improvement during this financial year and I think we are seeing a lot of good activity. I think the profit margins are going to improve, not because of readjustments of cost, but because of changing the revenue mix that we are working on.

As I said we have moved off or we are trying to move off of the offshore India billing kind of selling proposition to being a partner on the IoT side, so the revenue mix as such is going to change, we are not just selling India outsource offshore kind of business but selling really strategic partnerships with customers that helps in improving what we can charge on the customers.

For just programmers today, you know, just sending people on projects that kind of a market is very much going away and we are pretty happy that we have been able to make the adjustments in the last couple of years to position ourselves for the new market that is coming up.

So it is going to be exciting. I think there are lots of opportunities and what we have done in the last two years will really help us in where the market is moving and being at the right place at the right time.

ET Now: Analysts point out that the EBITDA margin challenges will be more pronounced in the first half. Where do you see margin improving and when do you think the mix actually will improve?

Anand Deshpande: In the beginning of course as we transition the fact that there are going to be additional costs in the first two quarters are definitely going to hurt the margins. But I think there is a way around. This is by changing the revenue mix. If we are able to change the revenue mix effectively, we will see improvement in margins. therwise just doing the same kind of things is not going to give you improvement in margins.

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