Satyam Computer has announced its Q2 FY09 numbers. The company has reported a growth of 6.05% in net profit of Rs 580.85 crore as against Rs 547.70 crore, QoQ. Revenues were up by 7.6% at Rs 2819.29 crore versus Rs 2620.83 crore. Satyam has met its second quarter guidance; revenues went up by 2.3% to USD 652 million while guidance was USD 645 – 651.9 million. EPS stood at $0.39 per share, wherein also the company met its guidance.Rupee guidance changed only for rupee move from 43- 47 per dollar.
Satyam has cut its FY09 revenue dollar guidance to USD 2.55-2.59 billion versus USD 2.65-2.69 billion. Ramalinga Raju said that 3% was due to cross currency movement and 2% on account of reduction in volumes that he expects.
The Satyam Management including Ramalinga Raju, Founder and Chairman, Ram Mynampati, President, CHB and Srinivas Vadlamani, CFO spoke in an exclusive interview with CNBC-TV18.
The management said that the company’s dollar guidance was impacted 3% due to cross currency and 2% due to business conditions. It expects a 100-150 bps expansion in margins, which has helped in enhancing the dollar EPS guidance. It added that there had been some reduction in licences in ERP and said it was premature to quantify medium term prospects. The gross employee additions guidance of the company has been scaled down to 10000 from 14000-15000.
The management informed CNBC-TV18 that the company’s legal dispute with Upaid was status-quo and said that the hearing was slated for next year. It feels that it is too early to quantify the impact of the BFSI consolidation in the US.
Ramalinga Raju feels the near-term environment remains challenging. He added that forex fluctuations have impacted their US GAAP revenues by 3%. He does not see a dramatic slowdown and added that clients were circumspect over the 2009 budgets.
Here is a verbatim transcript of the exclusive interview with the Satyam Management on CNBC-TV18. Also watch the accompanying video.
Q: Could you start by explaining your dollar guidance, the revenue guidance- why has that been lowered? How much of it is because of cross currency issues and how much of it is because of the tough environment that you see around you?
Raju: It is a combination of factors. We have enhanced our guidance at the consolidated numbers at rupee level from 34% to about 35.4%.
At the dollar level we have reduced our revenue guidance from 26% to 21% at the upper end of the guidance. About 3% of that can be explained by the cross currency movement and 2% on account of reduction in volumes that we expect.
So under the current circumstances we believe we have done well for the quarter and we feel this is number that we are able to give confidently.
Q: Your dollar EPS guidance has gone up a little bit. Do you expect some kind of margin improvement in the next two quarters despite some volume erosions?
Raju: We expect about 100-150 basis points improvement. We have particularly done well last quarter, better than what we had anticipated on the margin front and arising out of that is the enhancement at the yearly level as compared to the earlier guidance.
Q: Your thoughts on the environment around you because people have been circumspect about the next few quarters for Satyam because of your exposure to the ERP (Enterprise Resource Planning) segment where we have heard some distressing noises from and also the financial segment where you have a fair amount of exposure. Could you just take us through how you see the turf for these two?
Mynampati: Our exposure to financial services in the market is somewhat lower then many of our competitors. We do not see anything dramatic happening to us specifically. We are moving with the market. Most of the customers that we are dealing with have become circumspect in their outlook for the next year and beyond. We believe that we need to be cautious about our approach to the business in the financial services sector and that is pretty much universal as far as outlook for financial services market is concerned. However, we are not any more negative than what the market is.
Most of our customers seem to continue to do business with us. We don’t see any added risk in the financial services market. The Enterprise Solutions has been the corner stone of Satyam and our strength is very pronounced in that market. In the next couple of quarters, business may remain at the levels that we are seeing today. We do hear some talk about reduced licenses from some of the product vendors; we don’t know how that would impact our business yet but we are fairly confident of our prospects in the next couple of quarters as far as Enterprise Services is concerned. For FY10 we will have to see how the reduction in licence sales would impact our services revenue but that’s too premature for us to predict. But for the next two quarters we seem fairly optimistic about Enterprise Solutions market.
Q: I believe you have indicated that this consolidation amongst financial entities is adding to the uncertainty. What do you think might be the big fall out that volume scale down or that pricing takes a hit?
Raju: At this time it is difficult to predict as to how things will unfold. The consolidation of some companies - vendor base may in fact work in our favour as well. It is just that we need to reassess things and see as to what the implications would be. So generally speaking we believe that this is a period where we have to watch things fairly closely.
There maybe some things which will work in our favour and some things may go against us. On the whole we believe that if we provide for about couple of percentage drops in volumes arising out of various factors, we would have covered for things reasonably well.
Q: You had worked at under 43 for the rupee/dollar and things have changed quite dramatically since then- what are you do you see in the quarter that is under way and how much of an impact it will have on margins- what range are you setting out for margin performance?
Vadlamani: This quarter we are assume that one dollar will be around Rs 47, so that is what we have factored into our guidance that means a depreciation of roughly around 7% from the last quarter levels. So having factored that in, we are assuming that our operating margins will improve. This year definitely the story belongs to the margin management, while we are facing headwinds on the volume side but on the margins side I think we are going to do well.
At the beginning of this year we guided that our margins are going to decline by around 50 basis points (YoY) but now we are anticipate our margins will improve by 100-150 basis points. So this is not entirely because of the rupee/dollar. This is also because of the efficiencies we have brought into our operation, the cost of delivery coming down, the loading factors improving, the Selling, General and Administrative Expenses (SG&A) being kept under rims. So there are various steps we are taking basically to protect our margins and not only protect but improve over the last year. So overall on the margins front we are doing quite well this year.
Q: Q: Have you had reason to scale down your employee additions or projections of employee additions in any way because of the kind of environment?
Raju: In the beginning of the year we had given a guidance for about 14,000-15,000 people being added. The guidance that we are giving for the current year now, after the dollar guidance having being brought down to 21% is about 8,000-10,000 gross additions for the year.
Q: Take us through what you see from the pricing front. Mr. Raju touched upon it but from any of the key verticals which contribute significantly to your revenues have negotiations started and are you expecting to see any kind of price declines which are material over the next two-four quarters?
Ram: With what transpired in the last quarters and I am not sure whether I will be able to predict what will happen in the next two quarters. So far our experience this year has been a fairly stable pricing environment. We have had renegotiations done with customers where we did realise increase in price as well in the last couple of quarters while the environment appears to be challenging heading into the next couple of quarters. So far we have reasons to believe that the pricing would remain stable at an average realisation price for this year.
The financial services market is somewhat different as compared to any other markets so we have few instance where we had some challenges on pricing but nothing outside of financial services that we need to take into consideration to conclude that there would be challenges in pricing for this year. So we continue to believe that the pricing environment for FY09 would be stable.
Q: Can you just update us on the legal dispute with Upaid?
Vadlamani: On the status quo there isn’t much of a movement there because that is definitely subjudice and slated for hearing somewhere next year. So we need to wait until then. Our stated stand continues that we are basically confident about our own case and we are going to defend it.
Q: You spoke about how consolidation in the US financial segment is affecting your business but with specific clients like Merrill Lynch etc because of the transition, do you expect any major disruptions?
Raju: It’s too early to tell but generally speaking we assume things should continue to remain positive. Two giants come together - whether it is negative or positive for us – we have to wait and watch because it could as well be seen as gaining an additional customer in Bank of America as compared to necessary issues arriving out of some consolidation that may have in the process. We do a lot of work, which is mission critical there and therefore we are assume that we are on a fairly sound footing there.
Q: What are you assuming in terms of utilization levels in your margin calculations now because we note that you scaled down the employee addition requirements quite significantly, but even so given the environment what are you working with?
Vadlamani: We expect the loading factor to be under pressure, so we have factored that into our guidance that from the current levels we may see some marginal decline in the loading factors in the next two quarters, because we assume our revenues to remain constant at the current quarter levels.
Q: Is this employee addition under review in the sense is it possible that it might be scaled down to less than 10,000?
Raju: As I have stated the guidance that we are giving this time is for 8,000-10,000 people for the year, it goes without saying that we would stay well in tune with the happenings in the next several months and if there has to be any significant change in the outlook that we have witnessed we will accordingly revise our guidance. But at this time we believe that, if we were to have about 8,000 to 10,000 people, we should have business to deliver on the guidance.
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