One of Persistent’s top-5 clients has decided to sharply cut its product engineering spend to Persistent. The management has consequently indicated a muted Q4FY15 with respect to revenue growth and margins.
Whilst this is a near-term negative, we see no change to our long-term thesis on the company. Persistent will be a key beneficiary of the rising adoption of digital technologies , which will be offset to a small (and reducing) extent by sluggish product engineering revenues from legacy products. We have cut our FY16-17 EPS estimates by 12-14% and our target price by 9% to R1,000. We retain our buy stance.
We understand that Persistent’s client has cut its spend due to internal restructuring/realignment of business priorities and not due to any delivery issue at Persistent. We have been highlighting that the product engineering segment (~60% of revenues in FY14) is highly volatile and exposed to such risks. Further, Persistent, with 50% of its revenues from its top-10 clients, is vulnerable to client-specific issues.
We have cut our Q4FY15 revenue growth dollar estimate to 1.7% q-o-q from 8.3% q-o-q earlier, due to reduced revenue from this client and adverse cross-currency headwinds (0.5% impact). We have not changed our revenue estimates from the platform-led and IP segments. We have also cut our Q4 ebit margin estimates by 270 bps to 15%.