January 24, 2024 | Posted in News
The mid-tier IT services company currently has over 75 active generative proof of concepts in work. While the revenue is small at the moment, Kalra believes it’s a promising area.
Mid-tier IT services company Persistent Systems continued to deliver double-digit year-on-year growth both in terms of revenue and net profit in a seasonally weak third quarter ended December 31, performing better than its tier-1 peers.
The company’s total contract value for the quarter was at an all-time high at $521 million.
In an interview with Moneycontrol, CEO Sandeep Kalra, discussed the company’s hiring and utilisation strategy, generative AI plans, demand outlook and more. Edited excerpts:
Yearly growth in the banking, financial services and insurance (BFSI) and hi-tech segments has been slowing for the past three quarters. What do you read into it? By when do you expect recovery?
If you look at the year-on-year (YoY) growth for BFSI, it is growing at 8.8 percent, HLS (healthcare and life sciences) is down by 26.6 percent, tech companies 11.8 percent. But if I compare nine-month to nine-month (year-to-date) figures, the tech companies segment is growing at 16.3 percent, HLS 16.2 percent. So it relatively depends on which benchmark you’re looking at.
From our perspective, based on the pipeline that we have from the order wins, HLS at least for the next one to three quarters will lead the growth, followed by tech companies and then BFSI. Looking at it from the lens of the entire industry, BFSI is a little tepid at least for the next one to two quarters, then it’ll start coming back. So that is the industry dynamic we are seeing in our pipeline.
Within BFSI, which segments are expected to drive recovery? Especially in North America?
In the shorter run, the banking sector will be muted. The financial services side of it, private equity companies or other parts of the value chain will drive a little bit more growth. Insuretech is stable for us. Fintech is driving a little bit of growth. The mix maybe slightly different for us than other players in the industry. Depends on your own strengths as well.
Overall, how are customer conversations shaping up? What’s the outlook on discretionary spending for calendar year 2024?
Discretionary spend will take some time to come back. It is the good-to-have projects that are a little far out, but what is happening is this. At the same time, everyone has a business to run. Everyone wants to save the money from business-as-usual operations and put it towards anything that is revenue accretive or creates a competitive differentiation for them.
So we are seeing more interest in squeezing money from the support side, whether it’s an enterprise software company or an enterprise IT kind of an organization. The number of projects on the PoC (proof of concept) side for generative AI and broader AI, we are seeing some of them wanting to become mainstream. The good-to-have projects are right now parked and may come back over the next two to four quarters depending on the demand environment.
Will FY25 be better than FY24?
That’s always the hope. The fact of the matter is in any economy, good or bad, there are companies that will outperform the sector. Our hope is to build capabilities that will help us do that. Our hope is to have a management team that figures things out in a bad economy.
And over the last several years, when we went through Covid, we were one of the few companies that grew. Post-Covid as well, we were one of the companies with the highest growth. Through the last four or five quarters of macroeconomic slowdown, we have still been a differentiated company in terms of delivering capabilities to customers that translated into growth.
Persistent has been reporting a record high quarterly deal pipeline in the past couple of quarters. What’s the deal mix looking like? Do you expect to sustain these levels of deal wins in the upcoming quarters?
Overall, if I look at it, the deal wins have been good. If I look at the total contract value YoY, it’s about 18.4 percent growth. From an annual contract value perspective, we have grown about 20.2 percent YoY. Seventy-nine percent of our business is in the US, and traditionally that’s where we get most of our bigger renewals. That also makes the whole thing lopsided. But on a trajectory basis, the winds have been picking up, the pipeline is good, we’ll let it pan out. That is fuelling the revenue growth. If we are able to deliver a disproportionate growth in the industry versus our peers, it’s on the back of these bookings.
The deals we are seeing are of various types, whether it is cost reduction, helping some of the healthcare customers embrace latest technologies, to vendor consolidation, using vendor consolidation to take the spend down while investing in next-generation programs. And not to forget, our investments in private equity where we have partnered with private equity on carve-out deals.
What’s the update on Persistent System’s generative AI plans? How’s the pipeline looking, can you share some numbers around it?
At the highest level, whether it is us as an enterprise versus many of our customers, this is a boardroom topic. Everyone is very curious about generative AI and its promise. There are many PoCs that have been spawned. At this point in time, there are 75-plus active PoCs — small to big — that we are involved in.
Now doing a PoC requires limited data. You can take even synthetic data, which is basically artificial data on the lines that you want, but when you take it to production you need real live data in your own enterprise. That creates a whole new set of work. For people to go mainstream, into production, some guys who have very clean data can go much faster in the next three to nine months, some people will take time.
We do expect generative AI to become mainstream over the next two to three years. While the revenue is small, the promise is big. This is not just for generative AI but overall AI.
Persistent Systems was one of the few companies to continue hiring and adding net new employees this quarter. You had said you are looking to improve utilisation rates going forward. Does this mean we’ll probably see hiring slowdown in the upcoming quarters?
If you look at utilisation, there are two parts to it — the lateral hires and the people we bring in from the colleges who become productive over a period. Even the freshers we hired two years back are at about 64 percent utilisation. We need to figure out how to make the rest 36 percent productive or we will have to figure out optimisation. Laterals are working at 85 percent. That means there is a potential to go from that 81.5 percent to 85 percent at a company level, if we are able to get the fresher hiring right and productivity of those lateral hire right, so that is one part. That’s one big lever because every percentage point of utilisation adds 0.3 percent at the PAT (profit after tax) level.
The second optimisation is if I look at nine months of this financial year to nine months of the last financial year, we are at least 50 basis points up in our SG&A (selling, general and administrative) spend because we need to invest more in sales and marketing as the market is not there and we want to keep growing.
Your attrition rate at 11.9 percent seems to be at an industry-level low in Q3 as of now. Is there a comfortable range at which you see attrition stabilising? Also, what’s your fresher hiring target?
We have hired 400 freshers so far. We’ll take a pause for a bit and then see.
Our comfortable attrition range is between 10 and 15 percent. It could go down further from 11.9 percent this quarter, but I don’t think there is too much room left for going significantly down.
Also read: Persistent Systems Q3 FY24 – Industry-leading performance at a steep valuation