Mphasis is facing a tough time as parent company, and largest customer, HP cuts back its spend.
In the fourth quarter ended 31 October, Mphasis’ net revenue fell 2.3% to Rs. 13.1bn (£159m), operating profits fell 32% to Rs. 1.9bn (£23m), causing the margin to slump almost six percentage points (ppt) to 14.7%. In the full year, the margin slide was no less severe, falling six ppts to 16%, and net revenues were up just 1.2% to Rs. 50.98bn (£620.5m).
Two-thirds of Mphasis’ business is derived from HP, so it’s not hard to see why a decline in spend here would materially impact its performance. ‘HP channel’ revenue fell 12% in the quarter and 4.7% year on year to Rs.8.2bn (£100m) and Rs. 33.4bn (£407m) respectively. It was also down 4.4% on the previous quarter.
If this trend continues, reducing its dependence on HP is going to be vital to Mphasis’s future success. The good news is that it is making some headway to ‘go it alone’ as it ramps up selling direct to both mature and emerging markets - this helped non-HP revenue grow sequentially by almost 25%.
Mphasis is also pursuing M&A opportunities in platform-based business process services (BPS) to expand its client base in higher growth markets. For instance, during the quarter it completed the acquisition of US-based insurance software provider Wyde, which offers Wynsure, an insurance policy administration platform to clients in North America and Europe.
This is a step in the right direction. But if HP continues to reduce its spending with Mphasis over the coming quarters, we can expect more difficult times to come.