Black Box Limited (500463) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '26 Earnings Call of Black Box Limited. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectation of the company as on date of this call. These statements are not guarantee of future performance and involve risk and uncertainties that are difficult to predict. [Operator Instructions] I now hand the conference over to Mr. Sanjeev Verma, Whole-Time Director and CEO of the Black Box Limited. Thank you, and over to you, sir.

Good morning, everyone. I hope you all are doing well. On behalf of Black Box Limited, I would like to welcome you to our Q2 and H1 FY '26 earnings call. I'll start with an overview of our business performance and then our CFO, Deepak Bansal, who will walk you through the financials. Starting with quarterly performance, I'm pleased to share that our revenue for quarter 2 FY '26 reached INR 1,585 crores, marking a solid step-up of 14% quarter-on-quarter and 6% year-on-year, understanding the business momentum we are building. The strong sequential growth is on the back of stronger execution. Looking ahead, we expect H2 FY '26 to be stronger than H1. This confidence is driven by a healthy and diversified order book, improving visibility into key regional pipelines and stronger execution momentum across the businesses. On top of that, previously delayed projects are now moving into the delivery phase, which further strengthens our outlook. In short, we see the second half outperforming the first half, supported by a larger and more diversified order book, increased visibility into the U.S.A. and Europe pipeline and the progression of delayed projects into delivery. We're also seeing strong traction in high-growth areas such as their data centers and AI-led digital infrastructure, particularly across the U.S. and hyperscaler segments. To capture the expanding opportunities, we are building a specialized data center AI services team in the U.S. that will focus on higher-value, multi hyperscaling buildings. Further on the strategic front, we are happy to say that Black Box has partnered with Wind River, an active company and global leader in intelligent edge software to deliver next-generation edge and cloud solutions across industries. As part of this partnership, we have secured the rights to sell Wind River solutions globally with preferred status in India and Middle East. In addition, under a separate agreement, Black Box will manage end-user customer engagements across multiple geographies. This collaboration is expected to generate approximately INR 1,350 crores in revenue over the next 5 years, $30 million annually, further strengthening our position to scale up and diversify our revenue base. By combining Wind River's cutting-edge solutions with Black Box deep integration expertise, we are well positioned to drive accelerated digital transformation for our customers. Turning to the order book. Momentum in Q2 remained strong with the backlog at the end of quarter standing at $555 million, up from $518 million at the close of Q1 FY '26. Order bookings during the quarter were robust at $218 million, over INR 1,900 crores compared to $176 million in Q1 FY '26, reflecting an increase of $42 million. For the first half FY '26, total order book stood at $394 million. Based on the current trajectory, we remain well on track to achieve our full year order booking target of $1 billion, driven by continued focus on high-value contracts. Notable orders during the quarter included a significant expansion from company's existing large value clients for networking and connectivity from the company's largest global financial services customer and further engagement from our hyperscale customers, reinforcing Black Box's position as a trusted partner in complex, high-value digital infrastructure programs. The company received orders in digital workplace from U.S.-based local county and a sizable order from a health care institution. Financial services, health care and data center continue to contribute higher across the vertical serve. In addition to the expansion, the company secured new client wins across education, multiple sectors in India, reflecting the growing breadth of its market reach and the success of its go-to-market strategy. Our order book will continue to expand as we execute on our new go-to-market strategy, supported by experience leadership and business teams now in place across verticals and horizontal solutions. This foundation positions us well to achieve our long-term goal of which in $2 billion in revenue by fiscal '29 backed by growing and diversified for the pipeline. To summarize, with the business transformation program now largely complete and the more focused go-to-market structure in place, we are moving positively towards sustained revenue acceleration and a higher-quality business mix through FY '26. We are seeing a significant headroom for growth driven by business infrastructure demand, which is [indiscernible] fresh deployments and modernization of technology infrastructure. Backed by the strong fundamentals and market tailwinds, we are confident of delivering a stronger second half. Thank you. I will now hand over to Deepak to take you through the financial performance in detail.

Thank you, Sanjeev, for the detailed overview. Good morning, everybody. I will now discuss our financial performance for Q2 and H1 of fiscal '26. Revenue for quarter 2 FY '26 stood at INR 1,585 crores, witnessing a growth of 14% quarter-on-quarter and 6% year-on-year on the back of strong execution. For H1 FY 26, revenue stood at INR 2,970 crores. EBITDA for the quarter stood at INR 142 crores, representing a growth of 17% quarter-on-quarter and 4% year-on-year. EBITDA margins improved by 60 basis points on a quarter-on-quarter basis to 9% in quarter 2 of FY '26. EBITDA margins recovered from 8.4% in quarter 1 due to higher revenue throughput and better fixed cost absorption. For H1, EBITDA grew by 4% year-on-year and stood at INR 259 crores with margins at 8.7%. Looking ahead, we expect near-term margins to remain within the guided range. Over the medium term, margin expansion will be supported by improved operating leverage as volumes scale, a continued shift in business mix towards data centers and enterprise transformation engagement and sustained focus on cost discipline and delivery efficiency. As we execute our strategic priorities, we see potential for further margin improvement and continued strengthening of overall profitability. Profit after tax for quarter 2 of fiscal '26 stood at INR 56 crores, a growth of 17% quarter-on-quarter and 9% year-on-year, reflecting strong operating leverage and improved profitability in the core portfolio. For H1 of FY '26, PAT increased by 17% year-on-year and stood at INR 103 crores with margin increasing by 50 basis points to 3.5% in H1 of FY '26. As revenue growth accelerates in H2 of FY '26, our profit after tax expansion is further expected to outpace top line growth driven by margin normalization, improved revenue quality and greater contribution from high-value U.S. opportunities. As Sanjeev highlighted earlier, quarter 2 saw continued strong order momentum with the backlog reaching at $555 million at quarter end, up from $580 million at the close of quarter 1 of FY '26. Order bookings for the first half of FY '26 were robust at $394 million. Driven by this momentum, we remain on track to achieve our full year FY '26 financial guidance fueled by a sustained focus on high-value contracts as well as in the data center segment. To summarize, with strong order wins, growing backlog, strong execution capabilities, deepening client relationships and a healthy pipeline, the company is firmly on a growth trajectory. We remain confident in delivering an even stronger performance in second half of the year. Thank you. And I would now request the moderator to open the floor for the questions.

Thank you so much, sir. Ladies and gentlemen, we'll now begin with the question-and-answer session. [Operator Instructions] Our first question comes from the line of Deep Shah from B&K Securities.

Sir, it's good to hear that you've maintained your full year guidance. That implies somewhat like 25% revenue growth and somewhat similar EBITDA growth in second half of the year. So my question is, as we move into '27, '28, do we expect this -- the only [ 20 ] kind of revenue momentum to sustain, given the order backlog that increase? Or on a site medium-term basis, revenue growth should again come down to, say, early teens or mid-teens kind of level? That is the first question. And then accordingly, can we -- you did -- aware that margins will improve because of operate, but that is more like '27, '28? Or do you mean slightly ahead, next 2, 4 years? So that's the first question.

Okay. I'll bring it to your answers in 3 parts for the revenue for H2 then the second was revenue growth for the next fiscal year and then, of course, the margin expansion. So we expect from a -- Deepak as well and in my comments, we expect our second half to be stronger than the first half at the back of the pipeline. We expect to be able to meet the guidance between 11% and 15% of sequential growth. And I think our order book currently would support that and the pipeline that we have for the remainder of the year to be able to support our current year guidance that people just alluded to. Going back to the next year, fiscal '26, '27 and beyond, I think our plans are well elevated. We talked to overall goal for the next [ billion to $2 billion. ] The organic growth plan is close to 15%. So we expect our organic plan for '26, '27 in that range, although it's slightly early. Could we go higher than that? That will depend upon our exit backlog that possibly we revised that when we get into the last quarter. Our pipelines are very, very strong. But clearly, our overall go-to-market momentum, our overall investments, our overall pipeline is currently giving us confidence that we should be able to be at the mid double-digit range from an organic perspective going forward in fiscal '26, '27 and beyond. Coming back on the margin expansion, you would give us to allude the efficiency of scale and because we expect some margin expansion within the current year as well. So margin expansion will a little bit depend on the volume growth, volume growth of, let's say, roughly around 10% to 12% quarter-on-quarter, we are estimating right now. So in the current year, we are estimating that the margins should play in the range of, let's say, 9% to 9.5% type of range. But in FY '27, obviously, on this [ sustainable ] will continue in FY '27. And with the growth coming in and all those stuff, we will see that, on an organic basis, our margins will continue to be over around 10% or moving upwards to [indiscernible]

Sure, sure. Very helpful. Second question is on the cash flow. So if could you just help us understand better, the inventory increase of roughly INR 180 crores kind of represented on the liability side by INR 186 crores [ provision increase ] and then receivable increase of INR 107 crores, which effectively made our cash flow conversion pretty poor. So if you could explain what has led to this? And would it be a fair expectation that this will completely be reversed in second half of the year? Or there is sort of spillover into '27 also?

So I think all your -- as we have announced earlier and today also Sanjeev about a Wind River agreement and a Wind River partnership. So we have partnered with Wind River, and we have committed to buy the licenses Wind River to have those platforms which we have launched in partnership with them globally. And against that, we have purchased the inventory of those live services at a very deep discount rate, which will drive, obviously, in the future, the revenue, which I think Sanjeev spoke about, $30 million on an annualized basis, which will scale up slowly, slowly now from next quarter, which is quarter 3 onwards, it will scale up, which will drive the revenue. So that most of the inventory increase, I will say, 100% of the inventory increase is due to those licenses. While -- and we have -- what has also happened is that we have negotiated the -- in terms of that inventory. So as per the gap, what has -- and is those licenses have come and sit in our inventory. And the payment terms we have negotiated is a longer tenure. The first payment -- so we are paying in 8 installments to them. And the first payment starts from December 2026. So -- and that is why -- that is not sitting in the accounts payable, but that is sitting in the noncurrent liability because that is a longer tenure. Part of that will come next quarter in the current liability because of the 1-year type of nature. So that's the overall, let's say, on the working capital side of it. You also asked about the increase in receivables. So which increase in receivable is close to around INR 100 crores. The INR 100 crores receivable is primarily because most of the [indiscernible] a lot of invoicing, which happens to our customers in the month end and in the months and in the last 10 days period and all those things. Because we have always -- in our business, we always leverage skewness within the quarter where the first month, month 1 and month 2, will be probably between 55% to 57% of the overall quarterly revenues and most of the revenues happened in the last month of the quarter. So because of that, that receivable, so let's say, around 60% of the overall revenue or, let's say, around 55% of the revenue comes in the last month. So because of that, the receivable has built up and we have already started collecting the money now in this quarter, we have collected the money, and that's how the cash flow cycle goes on.

Our next question comes from the line of Nandan Arekal from JM Financial Limited.

Am I audible?

Yes, sir.

Yes. Yes. So sir, on an engagement from Wind River. So this is an IoT software provider. So if -- what is the rough fit between the reselling and the management contract in the deal? And what is like the margin expected [indiscernible]?

I missed the first line. What was the first question?

What would be the rough lag between the reselling and the management contract assets between the lease? And what is roughly the margin profile you're looking at?

Your first question is still not clear, Nandan. Can you be a little -- what you are looking at on the first question. Second question on the margin is first question, you're saying reselling or what?

Reselling and so we are doing both the reselling assets and the management of engagement. So what is the split behind that? And what...

Yes. So these are 2 separate execution contracts. This is a strategic partnership worldwide. Just to give some light on the Wind River, a part of an active company, publicly traded $21 billion. Wind River is virtualized software provider for both from an IoT standpoint and also for a large telecom operator. So it is adjacent to products by VMware, Red Hat. This puts Black Box within the platform space that we didn't have. We do connectivity networks, cyber data center, It is the platform space. So just to explain what this is about. As more and more edge data centers, more and more IoT and OT is built in manufacturing, the need for this software will increase, and therefore, Black Box considered a global partnership. The split for these 2 are not connected. Our services partnership, as I've told before, it's an agreement. We have a potential agreement of over 350 over 5 years' time. If you look at over the 5 years' time, we expect the average quarterly revenue in INR 40 crores and INR 60 crores. So that's our services revenue. The product revenue or licensing revenue, we'll have to see more. One, of course, we will be selling the license, we'll be installing and there'll be some services as well. So these are not connected. But if you look at the potential of that, I would say 50-50 on both sides, we add both. And so what we expect over the next 5 years' time, it will be 50-50. From a margin perspective, for the support of services margin, we are looking between 25% and 30%. We expect similar margin overall blended from our software sale as well. It could be -- sometimes we have got -- like people said, we have got a very good discounting because it's long-term partnership. He's also a range of kind of a long-term payment plan. So we expect the average margin in that range as well, although in some cases, we'll possibly have better margin, in some cases, might have slightly lower, but we should be able to have a licensing margins with sale of software at 25%, 30-odd percent. And the support services margin in the range of 20% to 30%. So that's our expectation. Deepak, you want to add?

Yes. So license, technically, I think we are pushing our sales team because we have purchased those guidances that we discount and the competition is only with VMware. And the VMware pricing at a, I would say, a standard price level, which is the MRP level, MSP level is almost like 3x of the Wind River licenses. now it is on our sales team. We already have the sales team training going on right now on all these things and internally. So by this quarter, it will pick up. We are expecting like from some customers, 20% from 40 and some 50 also on this, but on a blended basis, the license margin should be -- we are expecting at least in modeling right now around 35%.

Okay. Got it, sir. So this will be booked in TPS segment, right?

No. This will be in GSI. This will be in GSI segment only.

So this is a services business. This is a compute service and platform business. So we will be -- as we speak, this is initiative to expand our portfolio. The current portfolio had a listing lens of platforms with more and more data centers and computing and AI coming in, we expect more and more IoT coming in. We expect that we should be playing in this space. And that building we have had this tight partnership. It is a global partnership, very strategic, not only for buying and selling licenses, but also supporting many of [indiscernible] existing customers as well. That's the support contract.

[Operator Instructions] Our next question comes from the line of Garvit Goyal from Nvest Analytics Advisory.

Yes. Congrats for a good set of numbers, sir. My first question is on organic growth. We are speaking about -- in fact, we have been speaking about it for a while now. I want to understand, at what stage of evaluation are we currently in? And when can we expect something material output?

So Garvit, we -- last time also, I think we spoke about it that we continue to look at the opportunities. We are -- we have a huge pipeline like we have the sales order pipeline, we have the pipeline for the acquisitions also. And like we stated earlier also that we are very, very prudent in terms of our capital deployment. We will -- we are taking a little bit of time in terms of decision making in terms of reviewing it, engagement and how these inorganic opportunities work, that it is not like there is 1 viable which need to be solved. There are like multiple variables, which are which are getting into the angle, including the geography, the sales, the business itself, what are the cost taking opportunities, what are the revenue growth opportunities, and what is the multiple ultimately we are paying, how potently we can deploy our capital and generate the returns. And that is where everything is right now going on. But I can say that by end of this fiscal year, we should have, at least, let's say, the -- some good news available in terms of the acquisition and all those things and at the right opportune time, obviously, as soon as the -- we will take it to the Board as we make the progress. And then accordingly, we will inform, obviously, to the market about it.

And sir, what is the potential size we are looking at? And are you talking about the -- you mentioned about the geography as well. So what is the geography are you targeting? What kind of areas do we [indiscernible]