Aurum PropTech Limited (AURUM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Majesco Limited Q1 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Ms. Asha Gupta from Christensen IR. Thank you, and over to you, ma'am.

Thanks, Brinda. Good evening, everyone, and welcome to Majesco earnings call to discuss Q1 FY '21 results ended on June 30, 2020. Please note that we have mailed out the results and also, you can view the same on the website, www.majesco.com. To take us through the results and to answer your questions today, we have with us Mr. Adam Elster, CEO of Majesco U.S.; and Mr. Farid Kazani, MD and Group CFO of Majesco Limited. We will start the call with brief overview of the quarter gone by, which will be given by Mr. Adam. And then we will -- this will be followed by Mr. Farid who will be going into detailed financials. We will then throw the floor for Q&A session. I would like to remind you that everything that is said in this call that reflects any outlook for the future or which can be construed as forward-looking statements must be viewed in conjunction with the risks and uncertainties that we face. These risks and uncertainties are included, but not limited to what we have mentioned in the prospectus filed with SEBI and subsequent annual reports that you can find on website. With that said, I would now like to hand over the call to Mr. Adam. Over to you, sir.

Thank you very much, and good evening to everyone. Q1 FY '21 was a record quarter for Majesco across all our key performance metrics of total revenue, product revenue, new sales and margin. Total revenue was up 20% year-over-year, product revenue was up 34.6% year-over-year, new sales order backlog is now at USD 254 million, and margin was up 39% year-over-year. We remain confident in our strategy, committed to its execution and believe we have the right platform in place to handle the near-term challenges associated with COVID-19, while continuing to pursue long-term growth opportunities. And with that, thank you for your participation, and let me hand it over to Farid.

Thank you, Adam, and good evening to everyone. I'm pleased with the robust order on performance during the quarter. And despite the macroeconomic challenges for the economies across the COVID-19 pandemic, we have successfully completed the acquisition of InsPro, which has also helped us to access this growth further. We are extremely excited to partner with Thoma Bravo, a firm with an established track record working with companies transitioning to the cloud, and we look forward to a bright future. Let me enumerate the key highlights on the performance of Q1 FY '21. The operating revenue for the first quarter was INR 311 crores, reflecting a growth of 12.4% on Q-on-Q basis and 20% on a year-on-year basis. In constant currency terms, the revenue grew by 8.8% sequentially. The growth was primarily due to the inclusion of the InsPro business and the increase in the product business. The adjusted EBITDA for Q1 FY '21 was INR 46.7 crores or 15% of the operating revenue as compared to INR 42.5 crores or 15.4% of the operating revenue in Q4 FY '20 and INR 33.6 crores or 13% of the operating revenue in the previous year Q1 FY '20. The product revenue was INR 149.1 crores for Q1 FY '21, which increased 26.1% sequentially and 34.6% on a year-on-year basis, representing 47.8% of the Q1 FY '21 operating revenue. The cloud subscription revenue was INR 72 crores for Q1 FY '21, which increased 54% sequentially and 137.2% year-on-year, representing 23.2% of the FY Q1 '21 operating revenue. Net profit for Q1 FY '21 was INR 11.4 crore as compared to INR 31.4 crore in Q4 FY '20. The net profit for Q1 was impacted by onetime M&A expenses of INR 13.7 crore for InsPro acquisition, while the net profit of Q4 FY '20 was aided by an extraordinary gain on account of the reversal of contingent consideration for the Exaxe acquisition by INR 10.6 crore. The product R&D expenditure was INR 28.8 crore, which was 9.3% of the operating revenue as compared to INR 32.9 crore, which was 11.9% of the operating revenue in Q4 FY '20 and INR 38 crore, which was 14.7% of the operating revenue in Q1 FY '20. The company has rationalized its R&D investments in the international business through transition from a geographical investment approach to a more global product management and development structure and repurposed some of its teams to deliver new business. The total backlog as on June 30, 2020, stood at INR 1,918 crores, which is $254 million. Previously, we used to report a 12-month executable order backlog only. The total cash, cash equivalent and short-term investment was INR 263 crore as on June 30 as compared to INR 415 crore as of March 31, 2020. The drop was primarily on account of funding of the InsPro transaction and payout of incentives for the fiscal year 2020. The debt at the end of June '20 stood at INR 8.4 crore, primarily related to the InsPro equipment and software lease. The cloud customer base stood at 79 at the end of first quarter 2021 and it included InsPro cloud clients. We had successful -- 11 successful go-lives during the quarter, and we added 2 new customers, and 1 customer signed up to migrate from the on-prem to cloud. 100% of the employees continue to work remotely and deliver the services to our customers across all locations. As Adam mentioned, we are confident of our strategy committed to execution and believe that we have the right platform in place to handle short-term challenges created by the COVID-19 crisis, while continuing to pursue long-term growth opportunities. With this, I'll now pass it back to the operator to open the call for questions. Thank you very much, and we appreciate your continued interest in Majesco.

[Operator Instructions] We take the first question from the line of Ankit Pande from Quant Mutual Fund.

Very good quarter, excellent performance, so many congratulations to the management. Farid, if I could, could you just give a few points on how operating leverage is picking on for you? We have seen now that some benefits of scale coming through. And also on the very strong performance sequentially in such a quarter, is there something to read into more that this is cloud revenues and product revenues? Or is this truly some operating leverage kicking in?

So there's been definitely an improvement in the overall business with the delivery happening in a much consistent manner. So there's been a marginal improvement in the margins on the organic business that we do at Majesco, plus we added InsPro. Now InsPro comes in at a lower gross margin to us. Yes, and I know that it's because of higher subcontract related costs, and we hope to kind of improve and synergize that further. But yes, the overall margin improvement has come with the improvement in the operating leverage, which is a lower R&D cost on the base of revenue, which ended up at $41 million. And as mentioned earlier, we already had invested in the SG&A. And to that extent, there's been some improvement over there. And going forward, we don't expect too much increase in the SG&A.

Okay. Okay. Fine. That's helpful. And on the transaction with Thoma Bravo, could you just clarify in the interim from the time of announcement of the deal to the actual consummation of the deal, the value that is generated by Majesco, would it accrue to Thoma Bravo or would it accrue to the Majesco U.S. entity?

So we have signed the definitive agreement, okay? And there is a closure condition, which requires shareholder approval and other regulatory and statutory approvals to come in, okay? Whenever the closure happens, that's the cutoff when the company moves in the hands of Thoma Bravo. Till the time the company operates as existing Majesco and whatever business profitability cash that we accrue till date will be to the account of the existing shareholders.

Okay. Okay. So the valuation of the deal is still not absolutely certain. Is that correct?

The valuation of deal from a Thoma Bravo deal perspective got fixed at $729 million. That was based on kind of, ultimately, the negotiated deal with them. And obviously, it’s a dated transaction with a closure period and a closure time line. There's a further value that Majesco shareholders would get based on performance between now [Technical Difficulty]

The next question is from the line of [ Chirag Patel ], individual investor.

Congratulations for these wonderful set of numbers and wonderful deal, which we did. I have multiple questions. I'm putting together all the questions. The first question is, what will be the optimum mix of dividend or a buyback form to distribute the value which we will be going to receive holding at level post the selling to Thoma Bravo?

Yes. So I think I had reiterated that in the presentation to the investors and which has already been put up on the stock exchange website. We mentioned very clearly that we will look at the most optimal method to kind of distribute the money in the most expeditious manner, okay? So wherever we think that it makes sense to kind of improve the overall return to shareholders from a cash in hand, we will work towards that strategy. This is something that we are still engaging with bankers and tax consultants to be able to come to a conclusion. When we do that, we will obviously intimate to you. At this point in time, there seems to be 2 clear modes to distribute the money, which is a buyback, share buyback, which is restricted to 25% of the reserves that we were given and a dividend option. But at this moment, I cannot give you a percentage or a breakup or an allocation of that, as things are still fluid. Once we get to a closure, we get to the Board, which decides based on advise that we get, it will come back and then intimate you with the exact breakup that we would like to kind of distribute to the shareholders.

Okay. My second question, post completion of deal, as you mentioned that Thoma Bravo only interested in the U.S. subsidiary, I mean Majesco U.S. So post that, our 10% or 12% revenue coming from Europe continent and others, so what will we be going to do with those operation? Will the Indian arm will remain listed? Or what? Will we take to private?

No. So the India does not own any operations. The entire operations globally is all owned by the U.S. The transaction is for the entire global operations, which is under the U.S. entity.

Okay. So Europe is also routed through U.S. subsidiary only, right?

That's right.

Okay. So this Indian -- the holding company which is listed on Indian bourses, will it remain listed or got delisted?

See, the -- once the cash is distributed, which was lying -- whatever was lying with the company, then the process will be in terms of doing the compulsory delisting and dissolution. So that's the next step whenever it happens.

Okay. So all these exchanges have time line by -- the given time line is December 2020. So everything, including the deal and distribution and even this compliance, you're expecting to over by December '20, right?

No, you please read the presentation. We said that transaction closure will happen by the end of December 2020. Whenever that money is coming to India, that is -- thereafter, the distribution will take place and whatever time and process time lines for buyback, dividend and for dissolution whatever time lines, those are after the closure period.

The next question is from the line of Rohith Potti from Marshmallow Capital.

So my first question is, if you could please repeat what you mentioned to one of the previous participants on what will happen to the profits and cash that is accruing to the U.S. entity till the deal is finalized? That, I believe, is December 2020.

So the deal has been signed in terms of definitive agreements, there is a closure period. And between now till the closure period, nothing changes for Majesco shareholders, okay? When the closure happens is when the transfer of shares take place, which means the buyer will make payment to the U.S. shareholders, okay? And that is when they actually will have the control of the company. That date is all dependent upon all these regulatory and shareholder approvals. So till that time, everything continues as if it is being owned by Majesco U.S. and our share as Majesco Limited share in Majesco U.S. being 74%, nothing changes.

Yes. So broadly, what this means is that, let's say, the transaction is finalized by the year-end, that is December, it would still mean that the cash accrual to Majesco U.S. will go to Thoma Bravo and it is not going to be repatriated to India -- the cash that is there in Majesco U.S. in anyway, right?

Yes. In that sense -- that is exactly right. So because it assumes that the cash which is there will be used for the business, right, and used for the growth of the business or for the CapEx requirement. So there's both inflow and outflow of cash that is going to be required at the Majesco U.S. That cash, which is generated at Majesco U.S., will remain there. What cash Majesco Limited gets is the rental income from the Majesco U.S. because it has rented out the property to them.

Understood. The next question I have sir is that in addition to -- I mean it was a very nice presentation that you shared, and I appreciate that. Just wanted to know if, in addition to cash at the Majesco India entity, do we have any real estate asset that you -- we're potentially looking to liquidate and distribute the proceeds of those as well?

Yes, that would be the objective, but it's a very tough answer right now to say when and what amount we will get in terms of when we liquidate the real estate because today's market is completely different. But that's the only asset besides the 74% investment that the Majesco Limited owns. So whenever we come to a stage that we have to close shop, in the sense, complete all the distribution of money, then the idea would be is to monetize the real estate and also distribute that to the shareholders, and that will be at the time probably when we complete the dissolution -- a delisting and dissolution.

Understood. So just a follow-up on that. Could you give us a sense on what the real estate asset we have, in what locations, and what is the area that we hold?

The real estate is in a location called Mahape, in New Bombay, and it is a building, which is a 7-story building with 120,000 square feet.

Understood. That's helpful. And broadly, coming back to the deal itself. So just was curious, the deal was finalized in the midst of -- I mean the dislocation that we're seeing around the world because of corona and right when the momentum in the business as is evident in the subscription and other metrics that you share on a regular basis, the client wins and subscription figures. So was curious to know the thought process behind the deal being done in the current juncture. And if you could share, that will be helpful.

Yes, Adam?

I didn't follow the question. Can you ask it again?

Yes, sure. So my question is more around the timing of the deal, was curious to understand the rationale behind the deal being finalized in the midst of a pandemic, and would it not have been more -- would we have gotten a better offer if you had waited for a year because we are seeing fundamental momentum also coming into the business?

No, we feel comfortable in the timing of the deal. We think the deal was very good relative to our transition from being a services company to a product company, relative to our transition to becoming a cloud company. So we feel very good about the transaction. The timing in the midst of COVID obviously unique, but I would tell you, just like our operations have been running smoothly since we've gone 100% remote, I will tell you the process was very rigorous, and we were able to operate remotely throughout the process. So we feel the timing was good, the price was very good, and the process was very thorough.

The next question is from the line of Rahul Jain from Dolat Capital.

Congratulation on a good quarter as well as the good deal and especially the icing on the cake and then the cherry on the cake as well. Just sounding bit greedy out here, but is this the final offer by the agreement? Or still there is technically a possibility of another big possibility?

So Rahul, technically, it is all possible, okay? But keep in mind that in terms of the process, when we got a third-party giving us another competing bid at $14.5, the company was able to negotiate a significantly higher price at $16 with Thoma Bravo, but it was on a condition that the promoters will not vote on another superior offer to the extent of 50% of their shareholding where they own 38% in Majesco Limited. So roughly 19% of that shareholding, they would not be able to vote in favor. For that matter, they will have to vote against that superior offer. And therefore, if any other new buyer has to give an alternate offer, which is higher than $16 to the shareholders, effectively, they'll have to keep in mind these conditions that the promoters have agreed, and the promoters agreed basically because we could negotiate that higher price at $16. And this condition is going to prevail for the next 7 months.

Right. Right. So no, this was more like a technically -- just wanted to understand for my learning. I think you guys have done a great job. And to get a counter and re-counter offer really proves the kind of a strong business that you have created. And I think all the management team and the promoters should be congratulated for creating such a business and eventually getting a respectable price for the same. And congratulations on that. Just last one bit from my side. You said about this land or any other asset point of view also. So technically, these things will be much, much longer. And as you guys have committed that you would like to compensate entirely on whatever proceeds the company received, but is there a time line from a post received basis that you have identified because, especially from a buyback perspective, sometimes the time lines are not very smaller. So if the idea is to give as quickly as possible or we have not gone on to that kind of a thing at all?

So Rahul, obviously, we've not gone into that detail as such because I did mention earlier that the final decision in terms of distribution is not yet done, okay? When we do that, we should be able to get a better grip on the time lines, too, okay? So my guess is that if we are able to close all these approvals and get the money by the end of December 2020, you should keep in mind actually that's 6 months' time frame by the time you get the money in your hands.

Okay. Okay. I think this is quite fair.

This is very preliminary judgment. It is not something that anybody can hold me up to, but it's a preliminary judgment right now.

Yes. I think the sole purpose of asking this is because when we talk tax efficient, probably sometime doing buyback and all could be a more fruitful based upon how you see taxation and different kind of the receiver. So that way the time line can become very, very long also. But I think your answer is a bit fair. The intention is clearly to distribute as early as possible. And I think you guys have been very transparent in mentioning about the entire distribution thought process right at the transaction presentation, I think which is very comforting. So thanks for that kind of transparency.

Thank you.

The next question is from the line of V.P. Rajesh from Banyan Capital.

For me, 2 quick clarifications. If I heard you correctly, you are saying that once you get the money in Majesco India in December, it would take at least 6 months for the money to be transferred to the shareholders. And obviously, that's an approximation from your end. Is that correct?

Yes. I said, again, don't hold me. It's just estimation based on initial judgment. As I said, it is still to be decided by the Board, and it will be routed through shareholder approval if we are going through a buyback.

Right, right, of course. Understood. And then secondly, are we very clear that there will be a dissolution of the company once everything is sold? Is that all -- is that sort of in principle agreed by the Board? Or that's also potentially subject to a change?

No, that also is open, Rajesh, very clearly because there are other ways to kind of structure it, so that it effectively puts more money in the hands of the shareholders. So again, I'm not going to be stating any options right now. As I said that we will always endeavor to see that we improve the overall return to shareholders, and we will find ways and means to make that happen.

The next question is from the line of Rajeev Agrawal from DoorDarshi Advisors.

I joined the call a little late, so pardon me if this question has been asked before. Can you walk through the reason -- so when I look at your presentation, you are making the assumption that around 19% will be the tax leakage there. Can you just talk through what is the reason for that? Like how have you come up with that number?

So Majesco Limited actually holds shares in Majesco U.S. Effectively, they will have to pay -- Majesco Limited will have to pay capital gains tax in India, okay, on the short-term and long-term investment that it holds in Majesco U.S. The good part is there is no taxation in the U.S. because of the exemption, okay, and because of the qualification that we have. The tax is only payable in India, which is a capital gains tax. The 19% is kind of an estimation based on the holding cost, and that's the number that we have right now taken into consideration.

Okay. So if it is capital gains and because this will be long-term capital gains, should I assume that it should be more closer to 10%, if there is nothing else that is being paid in U.S.

No, it is long term and short term because we've had investments over a period and there were some recent investments.

Got it. Got it. Okay. So to that extent, it's short term. Okay. And then I -- because I joined the call late, I heard the question around the liquidation. So you mentioned that the real estate property is around 120,000 square feet. What is your approximate value for that? Just an approximation for me to understand because I'm not very familiar with that portion of Bombay.

I tried my best to ask the best consultants in the industry, and no one is giving me an answer at this point of time. You very well know that the conditions in the marketplace are very fluid. And there has to be a real great investor to come and put money on the table to buy a real estate right now, knowing that there is real estate being released by various organizations. So at this point of time, I don't have a clue, neither is any consultant giving me a definitive answer.

Got it. And apart from this money from Majesco U.S. and the real estate, there is nothing of significant value in the company. Is that fair?

Absolutely, sir.

The next question is from the line of Arpit Agrawal from Electrum Investment.

Congratulations for the deal. I have 2 questions. One is on the real estate, but as I understand, the whole business is actually being housed there. So I'm assuming that the staff sits in the same building. So why do we even need to find a buyer outside? I'm sure Thoma Bravo as the business continues would be the first port of call.

It's unlikely that they would want to buy real estate. They would be interested in leasing space, not owing real estate.

Okay. Okay. So that's why you'll have to sell. So it's a leased asset in a way, right, because they will continue the business in the same asset.

Yes. We're going to continue the business in market. We would have a lease agreement. Given COVID and everything else, we would -- we are assessing lease options. So we will look at it, but we would not be in a position to own real estate.

Got it. And Farid, over to you. I just want to understand before, so as on date, what is the cash on books in the Indian company?

So Arpit, I have given that information in the presentation, if you can just refer to that, I put down that the cash after some expenses that we pay is close to around, I think, INR 23 crores, okay? And the cash position will keep changing till the closure date, because as you would know that there are various employees who are buying their options, and they have to pay cash to exercise those options. So there'll be some incremental cash coming in, but there are transaction fees and other expenses that we get incurred. So my estimation is that between these 2 it should get set off, we should end up with close to INR 23 crores, INR 24 crores of cash to be distributed.

So just one last one. So in this transaction, one thing which we noticed is that, obviously, first thing is you have to pay -- as Indian entity, we have to pay capital gains tax, and then you'll have to pay shareholders -- at the shareholders end. So was there not any way where the buyer was willing to buy the Indian company because that would have been more tax efficient?

Arpit, good question. That would have been a fantastic option for us as shareholders, okay? But you would know that any business buyer is not interested in buying a holdco investment company, which is listed in India, they would directly want to buy a company within the operating entity and an entity, which is readily and easily available to kind of take private. And therefore, the eminent choice for any investor would be to kind of buy the U.S. entity. If at all, there would have been a choice for them to consider the India option, then they would keep into consideration the tax leakage, and therefore, the pricing to the Indian shareholders would have been significantly lower.

The next question is from the line of [ Kashish Karutora ], individual investor.

Regarding the deal, it's basically [Technical Difficulty] sir?

Sorry, we missed you on that. Can you please repeat?

Yes, sir. What I meant is [Technical Difficulty] whether the deal has been paid the price at $1.15 per share with [Technical Difficulty] or it is say we have forwarded [Technical Difficulty] for revising this transaction again?

No, we did answer that question already that this is the current price, which Thoma Bravo has kind of revised upwards after we went back to them with a third-party offer that came in before this. And they revised the offer significantly to $16 on some conditions, which we accepted in the interest of shareholders. And that's price that stands today with Thoma Bravo. Technically, there can always be another bid, but there will be obviously a rider and a hinderance to that another superior offer. I did explain that to an earlier gentleman who asked the same question.

My concern is [Technical Difficulty] in future there might be some [Technical Difficulty] agreed. Whether there will be some changes in [Technical Difficulty]. That's my concern.

Your line is not good. Your voice is cracking. I'm not able to get your question completely.

Why don't we go to the next question? Very hard to hear you. Why don't the operator go to the next question?

Sure, sir. The next question is from the line of [ Chirag Patel ], individual investor.

I need some idea regarding the industry in which we operate. It's not related to our current quarter and the deal done. Like I just want to understand the solution and the software on cloud base we provide, are we able to cater to asset management industry as well apart from insurance?

No, this is insurance specific technology. So it only is applicable to the insurance industry, not other markets.

The next question is from the line of [ Zenil Jhaveri ] from JNJ Holdings.

Congratulations to the whole team for having such a fruitful outcome. I just had one question regarding the buyback. So you said it can be a maximum of 25% of the reserves of the company, correct?

That is right.

And this is post the transaction, the reserves, right?

That is right.

So approximately, how much would it be if given this is the final offer, what would be the amount because you would kind of know what the reserves would be?

Yes. So we have that calculation. Okay. It will be roughly around close to INR 750 crore, INR 800 crore, okay? We'll have to consider that amount, yes.

Okay. INR 750 crores, INR 800 crores. So first, you would do the buyback and then would be the dividend, right?

I mean if you do the dividend, then your reserve goes down, right, then there is no [indiscernible] buyback. It's logical, yes.

The next question is from the line of [ Jagdish Kumar ], individual investor.

Good set of numbers, and thanks for being a good product company from India and selling into the U.S. So just one query regarding say getting a better offer, right? So again, this shareholder approval and is that [indiscernible].

No. Technically, it's now a new postal ballot that has been given to shareholders, which has been sent on 12th August where the voting will end on September 11. And because there was a change in the terms of the offer, which required us to redo the postal ballot, but from a time line perspective, if you see my presentation, which I updated, I did say that there is not -- no change in the time line, we should be able to meet the same time lines that we had mentioned in the earlier presentation to complete by the end of December 2020.

The next question is from the line of [ Atria Raj Kumar ], individual investor.

Congrats on a great quarter. Just wanted to understand something about the deal valuation. So -- I mean, a competitor, which is Duck Creek, I mean, is going public this week, and they have been able to get a valuation closer to $3 billion. And if you see the top line revenue and the bottom and the EBITDA margins and the net profit, it seems like Majesco is kind of comparable? I understand that Duck Creek has significantly higher subscription revenue. So I just wanted to understand why it has a huge difference between the 2? And should I -- wasn't there a possibility of getting a better offer?

Yes. No, I appreciate the question. Certainly, the Duck Creek IPO is a very emotional situation. And certainly, we're in a certain stage of our transition from being a services company to being a product company and from moving to being a cloud company. So we feel good about our transition. We feel good about the stage we're in and the valuation. And Duck Creek is an emotional situation. And we had expected them to do an IPO in the fall, and it looks like it's going a little early.

Okay. Yes. But don't you think there -- we could have got a better offer considering -- I mean if we can get a better offer now, considering what the market is valuing these companies at.

I do not.

Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for their closing comments.

Great. Well, we thank everyone for your interest in Majesco. I know a lot of questions are related to the payout and taxes. And what I would ask you all to do is refer to the presentation on the deal, it has a lot of detail that will help you and really appreciate your interest, and thank you for your time.

Thank you.

Thank you. On behalf of Majesco Limited, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.