Another Disappointing Performance
Majesco Limited (Majesco) announced another soft quarter in 4QFY17, with revenue declining 6.2% QoQ to US$28.2mn, while profitability was better than expected, with EBITDA margin up 114bps QoQ to 6.8%, aided by cost control. In INR terms, revenue declined 7.1% QoQ to Rs1.9bn. Revenue pressure was owing to some client engagements moving from implementation mode to support mode, and these programs have been replaced by cloud-related projects, which typically earn lower implementation revenue. FY17 has been an underwhelming year for Majesco, with USD revenue up just 7.5% YoY to US$121.8mn, against initial expectations of healthy double-digit revenue growth.
From a geographical perspective, the key US (-7.8% QoQ) and UK (-11.6% QoQ) both recorded revenue declines, the second successive quarter when both these geographies have done so. On the other hand, the APAC region (+12.7% QoQ) saw healthy growth. Segment-wise, all segments – Licence (-59% QoQ), Professional Services (-3.5%), Cloud (-10.2%0 and Support (-6.9%) – reported major revenue declines. Order book saw some growth, from US$62.8mn to US$65.7mn (+4.6% QoQ) – the only redeeming feature of the quarter.
Revenue upswing likely from 2QFY18E
Majesco’s revenue in 4QFY17 was adversely affected by a greater-than-expected impact of transition of various client engagements, from implementation to support. With cloud-related projects typically characterised by lower implementation and lower initial revenue vs traditional on-premise software deals, this led to lower replacement revenue, pressurising revenue. The company expects revenue recovery from 2QFY18E. Majesco continues to stay the path in terms of its long-term business strategy, as its focus on cloud projects reflects its intentions to win greater long-term (5-7 year) contracts to boost revenue visibility, a key feature of cloud contracts.
Regards some key operating metrics, Majesco’s order book saw a rise of 4.6% QoQ, while TTM order book declined 4.9% QoQ to US$129.2mn. Majesco added 1 new client in 4QFY17. The company won 4 new deals, with 3 of them being from existing customers, while 1 came from the new client.
Outlook and Valuation
Near-term revenue headwinds are likely to persist, with management expecting a return to revenue momentum by 2QFY18E. However, we believe key underlying industry fundamentals, including greater third-party software adoption by insurers, remain on track. Majesco’s key IBM partnership has won an engagement with a tier-1 insurer and while it is as yet in its formative stages, there is strong growth potential for scale up. We retain our BUY rating on Majesco, with a Target Price of Rs556 (Rs546).
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