Black Box Limited (500463) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 and 9 Months FY '24 Earnings Conference Call of Black Box Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjeev Verma, Whole-Time Director and CEO of Black Box Limited. Thank you, and over to you, sir.

Thank you. Hello, and good morning, everyone. I hope all are keeping safe and healthy. On behalf of Black Box Limited, I welcome everyone to our Q3 and 9 months FY '24 earnings call. On the call, I'm joined by Deepak Bansal, Executive Director and Global CFO; and SGA, our Investor Relations Advisers. We have uploaded our results presentation on the exchanges, and I hope everybody had an opportunity to go through the same. We are happy to meet again. I'll start with a brief overview on the company, followed by business and financial performance for Q3 and 9 months FY '24. Black Box stands as a prominent global ICT solution provider, specializing in designing, deploying and managing digital infrastructure solutions for our esteemed global enterprise clientele, including fortune customers and cloud providers. Our footprint spans 35 countries and is bolstered by over 4,000 highly efficient professionals. Leveraging our expertise of 4 decades now, businesses can develop and deliver pertinent technological solutions and services aligned to their core business goals. Our strategy of GLOCAL, which is "Think Global, Act Local", enables us to maintain meaningful relationships globally while ensuring relevance and flexibility for our customers. This approach allows for cost-effective delivery across 35 countries, presented by our Center of Excellence situated in India. We have reported an exceptional performance in Q3 and 9 months FY '24 in terms of improving our margins and overall profitability. Our emphasis on cost rationalization and enhanced productivity has begun to generate positive outcomes, helping us to deliver good numbers. The projects order backlog for North America continues to be strong. Just to highlight the trend for projects order backlog for North America, this was $101 million in December '21, which increased to $185 million in December '22 and further increased to $193 million in December '23. So Y-on-Y over the last couple of years, we have seen good growth in terms of order backlog. However, we saw some shrinkage when compared to September '23 projects order backlog of $233 million. Deferment of CapEx plans at the customer's end coupled with slow decision-making and consistent execution of projects at our end on Q-on-Q basis led to a lower-than-anticipated order backlog. Our new projects deal wins for the quarter were in excess of $50 million. However, it was below our internal estimates, and we are confident that deal wins will gather momentum over the next few quarters given the robust pipeline and hyperactivity in the AI-led data center and cloud space. Our overall pipeline at around USD 2 billion stands at the highest level ever. During the quarter, all our business lines have been strong traction with significant contribution from projects and managed services in the areas of data center and digital connectivity, modern workplace and customer experience, networking and cybersecurity, and control room solutions. As we have highlighted in our past calls as well, the data center market propelled by the influence of hyperscalers and cloud provider is poised for substantial growth in the coming years. We anticipate seizing these opportunities with our superior design and execution capabilities, both in North America and international markets. We are currently engaged in active projects with 3 out of the 5 major hyperscalers. In addition, we're also serving other large customers in the enterprise domain. We remain focused on our endeavor to enhance margins and profitability. Although we are seeing some delays in decision-making from customers, which has impacted our revenue growth in short term, we remain optimistic about sustaining the profitability momentum. We are confident of remaining within our stated EBITDA and PAT guideline range for the year. That's from my side. I now hand over the call to Deepak to run through the financial highlights.

Thank you, Sanjeev, for the detailed overview. Good morning, everybody. I will now discuss our financial performance for quarter 3 and 9 months ended FY '24. Our strategy to focus on large revenue customers has started yielding results, helping us to achieve best 9 months performance across all the financial parameters. Starting with the performance for 9 months, revenues witnessed a growth of 4% year-on-year to INR 4,801 crores from INR 4,606 crores for 9 months FY '23. On a quarterly basis, our revenues for quarter 3 of FY '24 stood at INR 1,655 crores which is a growth of 5% quarter-on-quarter and muted on a year-on-year basis. Some holdup in decision-making at the customers end led to delay in getting new orders, thereby leading to muted performance in quarter 3 FY '24 on a year-on-year basis. If we look at EBITDA, we are happy to report a robust 75% growth year-on-year to INR 306 crores in 9 months FY '24 compared to INR 175 crores in 9 months FY '23. For quarter 3 of FY '24, we have achieved EBITDA of INR 116 crores, which is a growth of 62% year-on-year and 15% quarter-on-quarter. We have seen a consistent growth in our EBITDA margins. For 9 months FY '24, our EBITDA margins increased to 6.4%, which is a growth of 260 basis points year-on-year compared to EBITDA margins of 3.8% in 9 months FY '23. For quarter 3 of FY '24, EBITDA margins grew by 270 basis points year-on-year at 7% compared to 4.3% in quarter 3 of FY '23. Our emphasis on cost rationalization and enhanced productivity continue to produce positive outcomes, consequently leading to an increase in our EBITDA margins. Coming to profit after tax. 9 months FY '24 profit after tax increased to a robust INR 97 crores as compared to INR 1 crore for 9 months FY '23. Profit after tax for quarter 3 of FY '24 increased to INR 41 crores as compared to INR 8 crores in quarter 3 FY '23, witnessing a growth of 5.2x year-on-year. Our robust operating performance has resulted in better profitability despite higher interest rates. Our dedicated emphasis on profitability in recent quarters continue to yield favorable results, and we are confident that this positive trajectory of improvement will continue in future. We have seen a substantial increase in our EPS at INR 5.76 per share in 9 months FY '24 versus INR 0.04 per share in 9 months FY '23. For quarter 3 of FY '24, the EPS for the quarter increased to INR 2.43 per share versus INR 0.47 per share in quarter 3 of FY '23. In summary, we have seen a good uptrend in our EBITDA and profitability, and we expect to witness the same trend going forward and expect it to remain within the stated EBITDA and PAT guidance range for the year. That's all from my side. I will now request Sanjeev to join me for Q&A.

[Operator Instructions] The first question Is from the line of Vivek, an individual investor.

I mean we've done a tremendous job on the margin front. When do we start to expect some traction on the top line? I mean, given the fact that we've gone public with a 3-year stated goal of hitting INR 16,000 crores. I mean a lot of it will come from acquisitions, I'm guessing. But how do you expect revenue growth to pan out in Q4 and in FY '25, if you can give me some color on that?

I believe Vivek, your questions were a little choppy. I'm not going to hear very clearly. I think I got the last one, you're looking for '24, '25 guidance is what I heard. You had something about some EBITDA. I just didn't get the question correctly. Your voice was very choppy.

I'm sorry, I can repeat it if you want me to.

Yes. Can you repeat that, please?

Yes. I'm saying we've done a tremendous job on the margin front. When do we expect to see some traction on the top line? I mean will Q4 be better from Q3? And how do you expect FY '25 to pan out given that we've gone with the stated goal of hitting INR 16,000 crores. I mean, of course, a big part of it will come from acquisitions. But just how do you think the environment is playing out? And do you see any...

Sorry, I couldn't hear the first time. Yes, I think as I mentioned earlier, we are seeing kind of a mixed bag in our portfolio of business from the customer set. From our hyperscalers, we are seeing hyperactivity pertaining to making fast progress on creating AI-led data centers. So those are the projects we do. On the other side, our large enterprise clients are a little cautious with respect to various environmental factors, including interest rate, inflation and so on and so forth. We are seeing a little bit of softness and delay from a short-term perspective. And I think that's what I quoted earlier. From a perspective of what we have told going forward of a goal for focusing on $2 billion, I think that's where our focus is, which, of course, will include some element of being inorganic as well. So we're expecting guiding fiscal '24, '25 from a double-digit growth perspective. We have a short-term issue pertaining to saying, okay, there's a little bit of a delay. So the hyperactivity on data center, the enterprise market opening up, some interest rates softening down, down the year. Robust pipeline, as I said earlier on, of about $2 billion overall gives us a good confidence, as we move forward into the next fiscal year that we would be looking for maintaining or growing our growth momentum in double digits going forward, targeting towards going among goals of being a $2 billion over the next 3 years' time. So that's consistent with our thought process from a medium-term perspective.

We've spoken of a double-digit growth target. I mean this year, it seems very difficult. What gives you the confidence that FY '25 will be slightly better? I mean, as I said, on the margins, we seem to be on target and in fact even further than what we had expected. But what gives you the confidence that next year, we should see some traction on the top line? I mean, are you seeing any improvement on the margin as far as the deal momentum is concerned?

Yes. So I think as I said, we are seeing already the improvement on margin and productivity and Deepak alluded to that. And if you heard what I said earlier on with respect to our deal pipeline, which is a leading indicator, is very, very strong. The deal sizes are very, very strong. We are serving 1 hyperscaler as a major partner. We have moved to 3 hyperscalers and major partners going forward. So our deal pipeline, the advent and the focus on AI that will drive large-scale data center investments and cloud transformation. We built that digital infrastructure, and therefore, the pipeline is strong, higher than ever before. So those combination of those, I think, and our investments in the focused -- market focused verticals gives us the confidence that we are looking at a much better double-digit growth with respect to our revenues in fiscal '25 as well going forward.

Just one question on the margin front. I mean we have -- we are at a 7% rate. Do we expect to see improvement in the next few quarters? I mean we had -- you've talked about a 10% margin goal in the next few quarters. Are we on track for that? Because I'm guessing we can only go so far if we don't see any top-line growth, right? So any further improvement, I'm guessing a big chunk of it would also need for us to grow on the top line.

Yes. I think -- so we -- as I said, I think we have been improving our focus on deal margins by better selling and our cost efficiency. We expect to keep on track to achieve our goal of 10% margin as we move forward into the next fiscal year and year beyond. So that's our goal. We have come over the last several quarters from lower single digit to really higher single digit at this time. Then we will move forward better that, as you heard from Deepak going forward as well. And with increased revenues going forward, I think that will only help us to achieve our goals toward achieving a 10% margin goals.

The next question is from the line of [ Akshay Jain from Jain Capital Investment. ]

So a couple of questions from my side. Firstly, our TPS business did face some challenges a quarter ago. So can you provide some insights on how is the current performance of the business? And is it still facing any challenges that we have faced in the past or we have mitigated all the concerns?

Yes. So I think our TPS business remains within the range of 12% to 15% of overall business. We have had some supply chain and product challenges. We have relooked at that over the last couple of quarters, augmented our focus on our own IT-led products largely on control rooms. We narrowed down our focus on fewer products that have higher margins. We expect getting into fiscal '25 that we would be coming out of a much stronger product line focus, higher margins in the TPS business as well. So I think the difficulties we faced in TPS pertaining to our supply restriction and other supply chain issues are over. And I think as we get into our new motion of investing in R&D, we're expanding some of our product portfolios, which are high yield margins, and we're dedicating our focus into specific business lines where our controlling solutions are very, very attractive. So getting into fiscal '25, we expect to see a reasonable growth in our TPS business and higher profitability as well from that business.

Okay. Yes, that's helpful. So secondly, just continuing what previous participant had mentioned, the EBITDA and the profitability has been great. So congratulations on that front. But again, the revenue number seems a little tepid. So just any more explanation towards that? And how is the order win and project backlog shaping up as it seems subdued currently?

Yes. So I think as I said before, so we have a short-term blip. And I think when you build a business, you have to take a view mid-term and long-term. You cannot look at every day morning. So we do have a kind of a softness and a little bit of a delay with respect to some of our enterprise customers rolling out projects and/or delaying certain project execution as well. Having said that, on the other side, a set of our customers and business lines, more specifically in the data center and networking continue to push harder. So I think a combination of a good push part of our customers and enterprise customers a little bit slow has affected in the short term. But I think our overall pipeline on which we base our go-forward order book is very, very strong. As I said, it's closer to $2 billion at the back of very -- expectation with respect to more adoption of cloud, more adoption of AI that is being talked about and more adoption of more IoT devices coming onto the network and therefore some [ basic plans ] are getting made both overseas and India. We expect our order momentum at the back of a very high pipeline to mature and yield. And therefore, that gives us the confidence even if we have a little bit of a tepid growth, as you rightly said, we expect to gain back a double-digit momentum going forward in the next fiscal year.

[Operator Instructions] The next question is from the line of Raj Joshi from [ SNS Securities ].

Sir, I have two questions. The first one is that the data center has been a good contributor to our overall performance every quarter. And I believe this is on the back of one of our large social media clients. So wanted to understand, apart from that one large client, have we added any other client in the data center space that is contributing and leading to such growth?

The answer is yes. So I just mentioned in the earlier earnings call, I think we are serving 3 of the largest 5. We are serving 1 up until last year and a major part of this year. So the answer is yes. We have now engaged and I'm constrained to give specifically the names here, but we have a large deal, order one, not executed yet from large hyperscale data centers, 3 of them. We're expecting now to partner with the fourth one and the fifth one going forward. We are among the foremost leading companies who has the ability to build large-scale hyperscale data center with the partnership with the cloud guys. And I think we are seeing momentum in that space, and we remain a very, very strong player.

Okay. And my another question is we have a good performance in our EBITDA margin as on 9 months FY '24. How should we look at as a whole FY '24 and over the next 2 years? Like what is our ambitions and how we would like to achieve that?

So I think our CFO, Deepak guided that we would be within the range of what we have guided for this year for EBITDA. Going forward, we have stated our goal to head towards 10% is our ambition to go forward in the short term, right? And therefore, we will be moving forward as we scale up our business, get better productivity from 7% to 8%, 9%, 10%. That's our goal to get there. Over the next several quarters, we expect to move towards that direction quarter after quarter as we have done in the past coming up to where we are at this time.

The next question is from the line of Saurabh Sadhwani from Sahasrar Capital Private Limited. [Technical Difficulty] There is some disturbance from your line. Your are not audible? The next question is from the line of Raj Mehta from Wisdom Capital.

So my question is last quarter, we highlighted that we have started exiting some of our low-revenue customers. So have we exited from all of such customers?

Yes. Yes. So we have started to readjust our tail end customers as we speak, and that's the focus area. It's not a onetime process. It will take us several quarters to get there because at the end of the day, we do not want to leave a bad case to the customer. But yes, we are moving away from a tail end customers that are disproportionately [ lucrative ]. If we do not see value in the customer longer term, we will be moving that away from that customer. We are taking a 2-step approach. The first approach we are taking to serve this customer from our remote center in Bangalore to lower our own cost. The second, of course, we are taking an approach of increasing our prices to the customers. The third is, of course, it is not suitable for us to be moving away. As we start to gravitate towards large volume customers, our cost to serve is important. We want to serve appropriately. So yes, that traction, that assessment of the customers, the engagements are going on as we speak. We have taken some actions in quarter 3, but it will take us several quarters to be able to realize that as we start to move towards high-value, high volume customers.

Got it. Got it. And how we are seeing the growth in large revenue customers that we are adding? And what is the scope of growth further?

As I said, I think we are looking forward double-digit growth getting into next year. I think we have not yet guided yet for next year. But I think at the back of a very strong pipeline and the expectation that the [ enterprise ] customers, which are slightly slow at this time, will start to ease out in the later part of the year. The combination of large-scale customers in our networking and data center practice is opening up a little bit of enterprise customers going forward in the second part of the next fiscal year, we expect that we'll be able to drive a double-digit growth in the next fiscal year. We will provide a better guidance towards the beginning of the next fiscal year.

Yes. And my last question is that can you elaborate on detail on why is there a deferment on CapEx and the customers? And how we look at it in the upcoming quarters?

So two ways to look at it, of course, the cost of money is high for certain customers, so they're able to do any discretionary projects that the enterprise customer might have, they're trying to take a cautious approach. The labor market still remains very, very tight in America. The cost of money remains very, very high, right? And the market remains a little bit uncertain. So I think although the Fed has announced that there will be rate cuts coming in the later part of the year that hasn't happened yet. It's a cautious approach by some of our customers. So therefore, the decision-making, as Deepak said earlier, is a little bit delayed. Having said that, we haven't seen a drop in our pipeline or our engagement with our customers. So we are into regular conversation. So some set of our customers are slightly slow, and that has created a tepid environment in our overall revenues as you see in the current year, right? But as we get into our pipeline and get into the next fiscal year, we still remain bullish of our optimistic growth.

[Operator Instructions] The next question is from the line of Saurabh Sadhwani from Sahasrar Capital.

I hope it's clear now.

Yes, sir.

So I wanted to understand on the interest cost. So it has increased significantly. So I wanted to know the reason. And what are we expecting going forward in '25?

Deepak, will you take that?

Yes, yes. So the interest cost, like we all know that there is a high interest rate environment as of now in U.S. and most of our costs including our debt facility and including our securitization facility, everything is in U.S. where the interest cost has gone up from -- so my facility here are at LIBOR plus 200 basis points, but LIBOR or SOFR has gone up by almost like 5%, 6%, and that's why the interest cost has gone up. Now in fact, the Fed has indicated about tapering down the interest rate by cutting the interest rates, which we are expecting that should start from June, July, depending on, again, the inflationary data and the inflationary environment in U.S., how it evolves and everything. So in next 1 year time frame, we are expecting that the interest rates should go down again, should start going down quarter-on-quarter basis directly linked with the Fed reduction, most of the interest rates. So that's where we are. And some of the interest rate as compared to last year, the interest costs have gone up because we have drawn a little bit of more debt in terms of -- almost like INR 15 crores, INR 20 crores more debt that has gone up from last year to this year around INR 20 crores. So the cost of that is also coming in. But mostly, it is because of the interest rate increase in the U.S.

The next question is from the line of Vivek, an individual investor.

Sanjeev, I just wanted to get a broad understanding. I mean, given our peers in this space like Kyndryl or Presidio or ConvergeOne, they are much larger in terms of top 10, right? What is our right to win when we are competing against them in deals? I mean, what I'm trying to get at is that in terms of the capability set within our company, do we think we are there? Or do we need to invest a lot more in people and processes and systems? I'm just trying to get an understanding as to if the market environment changes, will it be a cleaner run for us? Or are we just not there in terms of what we can offer to the customers? I mean, Kyndryl is at a $16 billion run rate. We are barely at $1 billion. When we are competing against -- I'm just naming them as like one of the giants in the space. So what is our right to win when we are competing against some of the bigger players in the industry?

Thanks, Vivek. That's a very good question, actually. Yes, I think if you look at the right to win or brand permission, as we call it, I think it has earned over a period of time, it is a factor of capability and talent. It's a factor of network of operations across geographies because larger clients have footprint. So are you able to support that. And it's also a matter of scale. Do we have the scale to be able to do that. So I think in all the 3 fronts, I think if you look at our right to win, I think our network of operations spanning 35 markets mimics large operations and large players in the field. So therefore, contextually, from local and regional players, even if they are larger in volume, contextually, we can be different if a customer wants to deploy our services in other markets than U.S., be in Europe, be in Asia Pacific, we are present. So we have a little bit of an edge to be able to right to win. With respect to our capability and talent, now with our investments in Bengaluru and our local talent, what I call it local, I think we are well covered and ability to bring to market talent is much better than again our local peers, right? So that leaves us at a unique spot where we possibly can compete with a larger client. But the only thing left is scale, right? So we are currently at $800 million ballpark of a size, $800 million plus we are at this time, right? So I think -- so we are -- therefore, there's a need for us to grow. And I think we are growing and winning in specific areas. So we don't want to be everything for everybody. We are very, very strong in certain areas of networking, which is the bedrock of next-generation applications will run. Data center is where everything will be hosted. So we are able to compete there. So I think a mixture of our presence worldwide, our talent worldwide and gaining scale allows us that conceptual differentiator to be able to right to win. And again, the idea is to get considered more. If you're getting considered more, the chances of winning increases, right? So we are working every day, every morning to be able to increase our right to win. And so we have been able to get one leg up from regional domestic players here, purely for global customers. But then again, we have large players too, and therefore, we need to build up the scale. So I think we feel reasonably good that we are getting -- moving forward in the right direction. We're also looking forward getting into the next year to realign our focus more deeply into verticals and practices that we do and more on that will come in the future, how we are aligning to serve the market, what kind of talent we need to bring. But net-net, I think we are making progress with respect to our brand permission and right to win. Hope I've answered your question.

And just one last question, and I don't mean to dwell endlessly on that. As the environment stands right now, I mean, if the Fed doesn't cut rates or do you still expect or is that double-digit growth next year hinged upon the Fed cutting rates? I mean, as things stand right now, are you reasonably confident that we can hit a double-digit growth target for next year? Or is that basis a lot of...

No. So I think as I said, I think I'm looking at overall 3 things we look at. We look at the potential in the marketplace, the portfolio I have and the people I have, the three things and the partnerships we bring with others, right? And I think that gives me confidence with respect to -- specifically in 2 of our -- out of the 4 portfolios, the 2 portfolios are super growth, more specifically cloud infrastructure, data center and refreshing of the network from the legacy network to software-defined network to 5G and so on and so forth, which we are seeing even in India or any part of the world. And those 2 pillars are very, very strong pillars for us. So we will expect that for hyper growth. A very large part of our pipeline, for example, our data center business pipeline was $200 million or $300 million a few quarters back, stands at about $1 billion now. So at the back of our pipeline, the leading indicators, the conversations we are having gives me an optimism for double-digit growth going forward in the fiscal '25.

Okay. And on the acquisitions part, are we looking at any companies? I mean, I'm just trying to understand because for a 3-year target of $2 billion, I'm guessing up, I mean, we'll have to do it in bits and pieces, right? I mean, can you just give us some color on how you're thinking about that part of the strategy?

Yes. So I've told that before, and I think we are not actively -- and when the time comes, we'll definitely let you guys know. And I've told that before. And our thesis are not to be emotional about economics. We will not be emotional about the economics. Yes, we are open for inorganic part as well, but that isn't our focus area every day we wake up. We believe there is a strong growth in organic, but we remain open, right? I think as a growth company, we have done that before. And I think if it is accretive for us, if it makes sense in a certain market, we would. But it's not about being emotional just adding up something. We are focused on organic growth. We see our pipeline growing. We see that certain markets or certain technology aspects of AI and machine language and cloud transformations being very, very hyper. And we have some play there, as you know. So we remain focused on that. But we remain open with respect to seeing what is the possibility. And to that extent, if something comes, we are not into any active engagement, something to talk about now. But if something happens, I think we will consider if it makes sense for our stakeholders.

[Operator Instructions] The next question is from the line of Saurabh Sadhwani from Sahasrar Capital. [Technical Difficulty] [Operator Instructions] As there are no further questions, I would now like to hand the conference over to management for closing comments.

I would like to thank everyone for joining on the call. I hope we have been able to address all your queries. For any further information, kindly get in touch with me, Deepak or our Strategic Growth Advisors, our Investor Relations advisers. Thank you.

Thank you.

On behalf of Black Box Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.