LTTS Unexpectedly Slows Down in Q3 FY20
LLTS’ revenue growth in Q3 FY20 decelerated from 11.9% at CC in Q2 to +7.5% in Q3. The company was hit by a deteriorating situation in its Telecom & High-Tech (-26%), which was impacted by the ramp-down of two clients in its Semiconductor sub-vertical that represents (we estimate) 40% of its Telecom & High-Tech sector. LTTS, also, had flat growth (+2%) in its Industrial Products, with large accounts reducing their spend.
LTTS was taken by surprise in the sharp decline in Telecom & High-Tech, where it expected flat growth in Q3. The company is taking action:
- In Telecom & High-Tech, LTTS is focusing on selling its chip design engineering capabilities to media clients for needs such as set-up boxes, video equipment, and content distribution
- In Industrial Products, the company is targeting smaller accounts to counterbalance the decline in large accounts.
To some extent, LTTS is paying the price of its large deal strategy. The strategy has worked beautifully in FY18 and FY19, with revenue growth of respectively 24% and 20%.
However, since the start of FY20, LTTS saw one client insourcing (a USD 30m impact) and another one being shut down. Also, LTTS also suffered from one client in the transportation industry, which was impacted by the US-China trade war.
There is an element of bad luck: of the three clients that were difficult this year, two were LTTS’ large clients, bringing more than USD 50m in annual revenues.
Looking forward, LTTS is maintaining its focus on large deals, targeting Transportation, High-Tech, and Plant Engineering.
LTTS has maintained its FY20 revenue growth guidance of +10%, which implies a +6% revenue growth in Q4, with revenues stable in Telecom & High Tech. The company is now expecting its EBIT margin to be similar to that of FY19. The margin guidance is, however, depending on the revenue mix: LTTS is finding that margins in Medical Devices, Plant Engineering, and Industrial Projects (representing ~46% of revenues) have significantly better margins than other sectors such as Transportation, by 300 to 400 bps.