>ZYLOG SYSTEMS LIMITED: Q1FY11 results beat expectations

Zylog Systems Ltd’s (Zylog’s) Q1FY11 results beat CRISIL Equities’ expectations. While consolidated revenues were marginally higher than our forecast, the 103% y-o-y growth in
consolidated PAT was a surprise. Q1FY11 consolidated PAT accounts for 27% of our
existing full-year forecast. We will revise our estimates following our discussion with
the company management on key issues such as revenue growth drivers in
Q1FY11, expected salary hike, the likely employee mix and progress on the
integration of Brainhunter. Our back-of-the-envelope analysis suggests that we may
have to raise our FY11 PAT forecast by 10-15%. We continue to maintain the fundamental
grade of ‘3/5’, indicating that Zylog’s fundamentals are ‘good’ relative to other listed equity
securities in India.

Q1FY11 (standalone) result analysis
- Zylog’s Q1FY11 standalone revenues were up 3.5% q-o-q and 22.4% y-o-y at Rs 2.2
bn. The reported revenues for the quarter are 22% of our existing full-year forecast.

- The reported EBITDA margin was 24.4%, up 130 bps q-o-q and up 610 bps y-o-y
mainly on account of lower software development cost, which declined 24.5% q-o-q
and 31.5% y-o-y. Software development cost as a percentage of revenue for the
quarter was 8.7%, down by 320 bps q-o-q and a steep decline of 690 bps on a y-o-y
basis.

- Q1FY11 PAT was Rs 345 mn compared to Rs 266 mn in Q4FY10 and Rs 199 mn in
Q1FY10. The q-o-q growth in PAT would have been higher but for a 470 bps
increase in the tax rate to 21.1%. The reported PAT for the quarter is 31% of our
existing full-year forecast.
Q1FY11 (consolidated) result analysis

- Zylog’s consolidated revenues for the quarter were up by 139% y-o-y to Rs 4.6 bn.
Information about Q4FY10 is not available as the company has started reporting
consolidated quarterly results only from Q1FY11. The reported revenues were
marginally higher than our forecast, accounting for 25% of the existing full-year
forecast.

- EBITDA margin declined by 100 bps y-o-y due to the consolidation of Brainhunter,
which has lower EBITDA margin compared to the parent company.

- The consolidated PAT for the quarter more than doubled to Rs 353 mn vs. Rs 174
mn in Q1FY10 and accounts for 27% of our existing full-year forecast.
Likely earnings upgrade of 10-15% post interaction with the management
We will revise our estimates after we get clarity on key issues such as revenue growth
drivers in Q1FY11, expected salary hike, the likely employee mix and progress on the
integration of Brainhunter

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