Datamatics Global Services Limited (DATAMATICS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Datamatics Global Services Limited Q1 FY'22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Asha Gupta from Christensen IR. Thank you, and over to you, ma'am.

Thank you, Aman. Good morning to all participants in the call. Welcome to the Q1 FY'21 Earnings Call of Datamatics Global Services Limited. The results and investor presentation have been already mailed to you and it is also available on our website www.datamatics.com. In case anyone has not received the copy of press release and presentation, please do write to us and we will be happy to send it to you. To take us through the results today and to answer your questions, we have with us the top management of the Company represented by Mr. Rahul Kanodia, Vice Chairman and CEO; Mr. Sandeep Mantri, Chief Financial Officer; Mr. Mitul Mehta, Senior VP & Head, Marketing and Communications. Mr. Rahul will start the call with brief overview of the quarter gone by which will be followed by financials given by Mr. Sandeep. We will then open the floor for Q&A session. As usual, I would like to remind you that anything that is said in this call which gives any outlook for the future or which can be construed as forward-looking statement must be viewed in conjunction with risk and uncertainties that we face. These risk and uncertainties are included but not limited to what we have mentioned in the prospectus filed with SEBI and subsequent annual reports which you can find it on our website. With that said, I now hand over the call to Mr. Rahul. Over to you, sir.

Thanks, Asha. Welcome, and thank you, everyone, for joining our quarter one FY'22 earnings call. Congratulations to all as we enter into our 75th year of Independence and hope all of you are safe and healthy. We appreciate you all taking time out and joining us for this conference today. I will share with you some business performance highlights, and Sandeep, our CFO, will update you on the financials and post that we can get into a Q&A. We had a good start to the financial year, and I am glad to inform you that we are all seeing business coming back to normalcy. We reported a revenue of INR 287.8 crores as compared to INR 277.1 crores last year, which is a growth of 3.8% on a year-on-year basis and 1.6% on a quarter-on-quarter basis. However, excluding Cignex, which is a subsidiary we divested in Q4 of last year, we have grown 21.6% on a year-on-year basis and 1.6% on a quarter-on-quarter basis. Despite the challenges imposed due to the second wave of COVID, we sustained our double-digit EBITDA margins at 14.4% during the quarter as compared to 10.3% in Q1 of last year. Our BPM revenues, which now contribute 57% of our revenue, grew by 35.5% on a year-on-year basis and marginally dropped by about 0.4% on a quarter-on-quarter basis. Our IT revenues, which contributed 43% of our revenues, grew by 7.1% on a year-on-year basis and 4.4% on a quarter-on-quarter basis, excluding Cignex. Both of these areas experienced growth due to the increased customer demand and deeper customer engagement. I'm happy to inform you all that we declared an interim dividend of INR 2.5 per equity share. That is 50% of our equity share, which is a INR 5 share in the Board Meeting held on the 13th of August 2021. We are seeing a strong demand environment and our pipeline continues to remain healthy. As mentioned in our earlier calls as well, I would like to reiterate that the pandemic-induced challenges have accelerated the spend and investments in platform-based digital solutions like digitization, cloud, automation, artificial intelligence and digital experiences, which in turn has created huge opportunities for companies like ours. We continued to see specific opportunities in the process automation and dynamic content management areas. In line with this trend, we are increasing our focus on digital transformation opportunities and the U.S. market. We have strengthened our U.S. sales team and have -- with a sharper focus on intelligent automation products, including TruBot in robotics and TruCap in the Intelligent Document Processing. With the growth coming back, demand for talent and skilled people has increased significantly across the industry. This is causing high attrition and increased pressure on salaries and recruitment. We are addressing these challenges by expanding our operations into Tier 2 cities and negotiating higher prices with customers. Due to the second wave of COVID-19, Datamatics stepped up its CSR initiatives and donated an oxygen plant to a hospital in Delhi through the Rotary Club of Delhi Premier. We also donated mobile toilets and bathrooms for the rehabilitation centers of COVID-19 patients at Puducherry. Additionally, Datamatics deployed its TruBot's technology to help Nashik Municipal Corporation manage antigen test data for ICMR. I would like to take this opportunity to thank our customers and shareholders for continued support and trust. I would also like to thank Datamaticians for all their dedication and commitment shown during this difficult time. We are well positioned to adjust the headwinds created by the pandemic. We remain cautious and, at the same time, confident of sustaining the growth momentum in the coming year. With that, I will now hand over the call to our CFO, Sandeep Mantri. Sandeep, over to you.

Thank you, Rahul. Good morning, everyone, on the call today, and thank you for joining us on our quarter one FY'22 earnings call. I hope that all of you are keeping well and safe during this challenging time. Let me start with the key financials for the quarter ended on June 30, 2021. So, as explained by Rahul, our net revenue was at INR 287.8 crores, up 1.6% on a quarterly basis -- sequential basis and up 3.8% on a year-on-year basis. Without Cignex, the growth on a year-on-year basis was 21.6%. The growth was broad-based across all our business lines and verticals. The ratio of IT and BPM during this quarter was at 43% and 57% during the quarter. IT Services revenue for the quarter were at only INR 3.9 crores, a growth of 4.4% on a quarterly basis and 7.1% on a yearly basis. This is without Cignex, we are talking. IT Services EBITDA margin was 6.1%, which is slightly higher from the last quarter margin. And if we don't consider investment in products, our adjusted EBITDA margin was 10.7%. BPM revenue for the quarter was INR 163.8 crores, which is a marginal decline of 0.4% sequentially and a growth of 35% -- 35.5% over last year's same quarter. As you all are aware, our quarter 4 revenue include tax -- seasonal tax revenue, and that is why quarter 4 BPM number are really not comparable with the quarter one BPM number. Our BPM margin was 20.7% for this quarter. Our consolidated -- now coming to EBITDA, our consolidated EBITDA grew by 45% Y-o-Y. And if we exclude Cignex from last year quarter one, it was 85%, 86% Y-o-Y. Our consolidated EBITDA margin for this quarter was 14.4% as compared to 14.8% in Q4 of FY'21 and 10.3% in Q1 of FY'21. Without Cignex, our EBITDA margin was 14.4%, which is a growth of almost 500 point on a Y-o-Y basis. So, despite pandemic challenges, we are able to sustain this double-digit EBITDA margin due to cost optimization measures and also saving -- some savings due to COVID, and also there is a revenue growth during this quarter. Our PBT for the quarter was at INR 46.9 crores, a growth of 35.6% on a quarterly basis and 139.4% on a yearly basis. This jump you can see is due to onetime exceptional gain of INR 10.2 crores arising from buyback of equity shares [ deterrent ] redemption of preference share capital held in overseas subsidiary. PBT without Cignex grew by 35.6% on a Q-o-Q basis and 242.4% on a Y-o-Y basis. Our effective tax rate for the quarter was 15.9% as compared to 17% in quarter 4 FY'21 and 28% in quarter one FY '21. Our PAT after non-controlling interest stood at INR 39.6 crores, a growth of 38.1% on a quarterly basis and 193% on a Y-o-Y basis. Without Cignex, our PAT grew by 38% on a quarterly basis and 266% on a Y-o-Y basis. EPS diluted for the quarter was INR 6.72 per share, which is higher than Q4 of FY'21 and Q1 FY'21, where we were at INR 4.86 and INR 2.29, respectively. Without Cignex, our diluted EPS grew at 38.1% on a quarterly basis and 266.6% on a Y-o-Y basis. In terms of balance sheet, our balance sheet continue to remain at a healthy position. As mentioned in our earlier call, we are now a debt-free Company. As on June 30, 2021, our total cash and cash equivalents and liquid stood at INR 351 crores as compared to INR 254.5 crores last quarter. Even our DSO was at 70 days in quarter one FY'22, which is a slight increase from 65 days in quarter 4 FY'21. We continue to remain cautious on pandemic situation, and we are confident of converting these challenges and maintaining the growth momentum. In terms of our geographical footprint, U.S. comprises 58% of our business, India is 22%, Europe is 15%, and rest of the world is 5%. In terms of industry, BFSI continues to remain key segment for us, which is 26% of our revenue, Publishing is 28%, Technology & Consulting is 18%, Manufacturing is 4%, E-com is 6% and others are at 18%. Our client contribution remains healthy with Top 5 clients contributing 26%, Top 10 38%, and Top 20 52%. These are all briefly our financials. With this, I will now pass the call to operator to open the floor for Q&A. And thank you very much for your patience, and I appreciate your continued interest in the Datamatics. Thank you, guys.

[Operator Instructions] First question is from the line of NGN Puranik from Enam Securities.

Rahul, congrats on a wonderful quarter. A come back quarter in terms of how you have stabilized on your old businesses and especially in terms of automation. The way you're going about looks interesting. I'm referring to the BPM business, part of the BPM business, which requires intensive automation. So I wanted to understand how much of automation tools are used to our own TruBot and others are used in the BPM business. So that's important to understand because the margin expansion and all shows that you have used it effectively. So that will be a good lever when you go to the marketplace also. So you can...

The margin expansion is a combination of 2 things: increased automation, as well as the increased cost cutting. We did reduce cost in the U.S. and moved more work to India. Plus within India, we moved to Tier 2, Tier 3 cities and then we further automated it using a lot of our TruBot. So, has the automation adoption increased in the Company? Absolutely, it's increased substantially. We are doing more. It has not been a completed exercise. I think for the next 6 months, we will implement more automation, and therefore, improve margins a little more on the BPM side.

So what automation tools are used in BPM today currently?

So there are several tools. We are using our TruCap and TruBot, both of these, which we are taking to market also. Plus in addition to that, we have several other tools, we've used our TruAI to do automation in BPM, we were using TruBI. And then there are other tools that we are not taking to market, but we are building ourselves for improving our own productivity.

And these tools can also go to the market once it stabilizes within the BPM [ process ]?

Possibly, but not -- because see, when you take it to market, you have to productize it, that you have to -- so therefore, you have to make it a much more robust and package it in a way that it can be used by anybody. When we use tools internally, it's not something that any third-party can use very easily. So depending on the effectiveness of the tool and how it plugs into TruBot or TruCap, we will increase the features and functionality of TruBot and TruCap and plug them in, in addition to what they already have. So we'll have to look at that case by case basis rather than a blanket statement.

But is there any limitation to use TruBot and TruCap in BPM?

No, no. That is not restricting us. We just have to roll it out in a very systematic way because when the moment you put a new product or a new tool, it can create some disruption to the customer project, and we don't want that to happen. So we are in a very steady way taking customer by customer and implementing these tools.

So you have to showcase with a few anchor customers if the process develops nicely, then you take it to the customers?

Absolutely. And each customer is always nervous when you're doing something new. So you do a small little thing, he gets the confidence then you increase it.

So it's a transformation process as far as every customer is concerned. So when it happens with 1 or 2 customers, then it becomes easier for -- it becomes a reference case, and then you can deploy it with other customers.

That is also true.

So then the go-to-market with this solution and -- with reference case becomes easier for you. Isn't it?

Yes, yes.

So how is the TruBot and TruCap's market message today? So their sales marketing efforts are on?

Yes, we've increased -- as I mentioned in my address, we've increased the sales team in the U.S. They are beginning and we've hired some good salespeople from our competitors. So they're getting some very good traction in the market. And we are hoping now that will start moving for us.

And the new hire is...

The analyst coverage has given us some very good coverage, basis of what they've seen in the products.

So the head of this practice has joined and stabilized well?

Yes. Based in the U.S.

Based in the U.S.? What is he currently doing? Looking close to the market, looking at the...

Yes, his primary focus is to get the -- sales activity is going. So he's got a team. We are further augmenting the team, and we are also building more partners in the U.S. So that's going to be his primary focus because the product engineering is based out of India. They've done a good job. The analysts have compared our products feature-by-feature and given us a very good report on that. So his primary objective is to focus on sales.

So how do you motivate the alliance partners? So it is going to be a combination of your own sales efforts and alliance partners. So how do you motivate...

So it is a combination of 2 things: one is the kind of commission or discount structures that you give to alliance partners; second is the way you support them in making them successful. So we are passing on some opportunities to them. And whenever if they struggle, we support them in making sure that they successfully implement it for the customer. So when they get a successful implementation and they get a good commission from Datamatics, and sometimes when we get business for them, they are more motivated to do more for us. So it's a very symbiotic relationship. The more you do for them, the more they do for you.

So when they sell this solution, when they sell your product, is it stand-alone TruBot plus that goes into the market? Or is it any of their solution which gets bundled into it or their solution gets bundled into our solution? How does it go?

So most of the cases, our TruBot or TruCap. In some cases, they would plug it into their platform as well. So those types of partners are the OEM type of partners. So we have different categories of partners. So some are large system indicators, then you have the consulting firms and then you have the resellers and then you have the value-added resellers and you have OEM partners. So OEM partners have their own platform, in which they plug in TruBot or TruCap. But other partners don't have their own platform.

So what's the typical deal size in this transaction?

So typically, they starts around $30,000 to $50,000. And then depending on the customer, it could scale to $200,000 to $300,000. Then, of course, some of the larger customers can go to $1 million or so.

And that means that is their annual revenue?

Yes, annual recurring revenue.

Recurring revenue. So this -- and the deal size expand as you go [ by ]?

Yes, it expands basis the size of the customer. If the customers are large customers, then obviously it will expand. If it's a small customer, it tends to then plateau.

So is it a rollout on multiple application? How does it happen? They expand through rollout?

Yes, rollout to multiple processes within the customer.

With the customer. So -- and the sales guys will have to develop visibility for the opportunity?

That is correct.

So that process is in place now?

It's in place. We have to expand it. So the core team is in place. The team has started moving in the market, but now we are in the process of expanding it further.

So the marketing efforts are done, sales efforts have to go now? Is that right?

Both will go hand-to-hand. A lot of marketing effort has been done, but we need to do more, of course. The sales effort will now start kicking in.

So the sales process is what you're own internal homegrown sales process versus the sales process that brings a [ cable ] from their latest experiences the...

So it's both. This is our own sales team plus we've hired a team from our competitors, who are very familiar with exactly how the competition is selling this product.

So that's what I mean. So the new process is evolving. What current...

But it's falling into place quite well.

Falling into place quite well. So how is the pipeline looking?

Pipeline is beginning to increase now because U.S. is also opening up. They're coming out of COVID also. So the meetings have started happening, physical meetings. So it's now beginning to pick up, plus our marketing effort is also picking up steam. So now it's -- the momentum is good.

And how is the combination looking, the internal and the alliance partner mix?

So right now, it's more the internal sales. The alliance partners are beginning to kick in, but they need to kick in a little more. So we need to support them a little more actively right now.

And they need some reference case them to showcase. So then more days from alliance partners will follow?

Yes. So what happens is that they have references from Datamatics, but they need their own references also. So once they have 1 or 2 successful projects under their belt and they have their own references, which they can take advantage of. Right now, they are leaning on Datamatics' references.

And what about IT Services? Is there any specific focus on cloud migration or customer experience or...

Yes. It's more around cloud. It's around AI, it's around hyperautomation, which kind of dovetails with the intelligent automation. So yes, there's more traction there, but that is from a services angle versus a product sale. So we are beginning to see more of that happening as well.

So the IT Services will have a larger amount of automation content going forward?

Yes.

So that's interesting. So -- and then they will have the analytics also part of that?

So analytics, today, what we are doing is, we've taken a slightly different track. For analytics, we have partly bundled it along with Robotics and IDP solutions. Partly, we are taking analytics to our existing customer base within the existing service. So versus a stand-alone offering and the stand-alone platform, we are bundling it. So when we do, for example, finance and accounting services, we are doing for the customer spend analytics. So it's bundled along with the finance and accounting services versus a stand-alone offering. And that is getting better traction than the stand-alone because then they see value-add to the existing service.

And the tools used are internal tools or...

Yes, we have a tool called TruBI, which is a very important tool. So that's what we use mostly.

So what do you think would be the potential of a tool like this? Because the analytics is going to be a very large market with the kind of data that is being thrown out. So can it be potentially a huge opportunity?

Potential is large, but the analytics market is a very crowded market. And you have large companies, Tableau, ClickView, Microsoft with Power BI coming in, SPSS, SAS. So they are very well established, but they are pure-play analytics. So therefore, we -- it's not taking these guys head-on because it's a much more mature market. We thought we will sort of go under the radar and service our customers with -- through the existing services that we're offering. Otherwise, the moment you go as a product, they'll compare with Power BI, and we cannot compete with the Microsoft.

And particularly, spend analytics is overcrowded market. There are too many large and mid-size, small-size guys are operating there.

Correct, correct. So that is one example, but those kinds of things is what we are trying to [ disclose ].

[Operator Instructions] The next question is from the line of V.P. Rajesh from Banyan Capital.

So just trying to understand the product business a little better. Are you selling it as a product? Or is it just part of your IT Services business?

No. So the product business is Robotics and Intelligent Document Processing, those things called TruBot and TruCap. Those are being sold as products. The IT Services are different segment altogether. So the IT Services is what we've traditionally done, but that is also now getting into this intelligent automation, hyperautomation as a service, which is different from our product sales. So these products are being sourced separately as a pure license.

So what was the revenues from these product sales in the...

So right now, we are not tracking and disclosing those revenues separately. But it's within the -- right now, we're still in the early phases. The product has been featured very well by analysts who have reviewed it and covered us in their publications. So now we have to take it to market very aggressively. So we're not really tracking it separately.

But the expenses related to that, you're putting it in the IT Services, right, in one of your slides to talk about without product expenses.

That is correct.

So by when do you think you'll be in a position to talk about these products as a stand-alone? Or is it not a stand-alone, but as a separate business line?

Yes, probably sometime in the next financial year, maybe a year from now.

And then are you using -- I mean, your BPM as well? Or if you could just talk about how these products are helping you on the IT Services or on the BPM business wins?

So it is doing both. So we are using it in our BPM services also for our own productivity improvement, and you can see some of the impact on the financials of the Company. Second is that, when we go to market with these products, you're getting different kinds of deal opportunities, which are potentially large, anywhere from $10 million to $40 million, which is a bundled offering, including products, including services and which has BPM and IT altogether. So we're getting a new pipeline of offering our services, which are very different from what we traditionally did, which are including the product services, IT and BPM all put together. So that's opened up a new segment for us in the deals which earlier we were not looking at or they were not coming our way. So taking these products to market has helped us get a new line of leads coming in. They have not materialized yet because it's still early. For the last quarter or the last 6 months, I would say, we've got some very interesting deals, but not materialized yet.

And you were talking about earlier some recurring revenues. So what is the quantum of that?

So that's all the product business. So the product business will be annual recurring revenues because it's a subscription-based licensing model that we have adopted. So that's why we're not tracking that separately. But therefore, there's -- but in that space, there's more stability because the revenue keeps repeating every year, unless there is a problem with the customer.

Actually, you will disclose that next year, right, that what is the recurring revenue...

Sometime after about year.

[Operator Instructions] The next question is from the line of [ Riya Sharma ] as an investor.

As talent demand has increased, so what kind of supply challenges you are seeing and how we are attacking the same?

So we are facing supply challenges in the sense that when you rollout offers to new prospective candidates, the dropout ratio is much higher than normal. Dropout, meaning on the day he is supposed to join, the guy doesn't join. He just drops out. So that is a challenge. So what we have done is, we are focusing more on the Tier 2, Tier 3 cities and expanding our headcount there compared to the Mumbai, Bangalore kind of cities. And there we have a little better traction. And, of course, the costs are also a little lower than these large Tier 1 cities. So, yes, it is a struggle. The whole industry is going through that phenomena. But so far, we've managed reasonably well.

So my second question is employee headcount and attrition rate for the quarter, like any plans for the new hiring and wages hike?

So, our employee headcount is about 10,300 right now. And our attrition rate is, on an annualized basis, running at about 28%. So it's 7% for the quarter.

So right now, we have a good cash in the book. So how we are planning to use, like any M&A plans?

So on the M&A side, we keep looking at many opportunities, but our agenda is to acquire companies that fit with our core strategy, and that is a sweet deal. So it has to be available at a good price. And I don't want to be in a situation where we pay a premium just to acquire a company. So that's been our traditional strategy. We have acquired over 20 companies over the last 20 years. So we've had a run rate of about almost one acquisition a year, barring for the last 2 years, we've not -- during the COVID period, we didn't do any acquisition. So we keep looking at it. We are in dialogue with a few companies. But once they come to a more serious stage, we'll know what's happening. So that's on the acquisition side. Our focus is going to be to invest a lot of our funds into the product business. So we don't want to acquire that because we do need funds to invest in the product because that has a huge opportunity, and we need to capitalize on that opportunity that is there in the market currently. So we would rather spend on that front rather than spend it in too many acquisitions.

Our next question is a follow-up question from the line of V.P. Rajesh from Banyan Capital.

Rahul, just on the margins. EBITDA margin hit about 14.4% this quarter. So what's your guidance on this, especially given the investment that may be required for pushing the product business in the market?

So we will maintain roughly that level of EBITDA margin because the investments that we will make, hopefully, we will recover through the sales. So whatever we sell will get reinvested. So, I don't think it should have a huge negative impact on the margin. Having said that, it could move by about 0.5% here or there. That's possible. But I'm not expecting because what -- when you look at the whole year, whatever we spend now, we'll start recovering maybe in 3 or 4 months from now. So it should not have a huge impact. Unfortunately, we are not -- I don't know whether it's fortunate or unfortunate, we're not capitalizing our expense. We are expensing them out. So we had budgeted about INR 40 crore spend for this year on sales and marketing. I mentioned this in my last earnings call. So that's where we are. So for Q1, we spent about not INR 10 crores. It is about maybe INR 6 crores or -- INR 5 crore or INR 6-odd crores. So we are a little slow on that spend. We need to step it up a little bit.

Well, there may be some timing gap between the margin --. When we spend versus when we get revenue, there may be some timing difference. Otherwise, margins will be more or less in the similar line between 13% to 14% for this year.

The second question is on revenue growth. Obviously, you grew very well year-over-year. So what kind of growth we can see in the current year?

We will certainly, I think, end up in the teens this year. The same performance may not sustain for all 3 quarters going forward. But yes, it should be in the teens.

In this quarter, that it was quite high. It just the...

Just whatever 21.6%. So I'm not so sure we will sustain a 20% growth for the rest of the year, but it'll certainly be in the teens.

[Operator Instructions] Ladies and gentlemen, that would be our last question for today. I now hand the conference over to the management for their closing comments. Thank you, and over to you.

Thanks. Thank you. I would once again like to thank all of you for spending time with us today on this earnings call and for your confidence in Datamatics. And hopefully, we will have a good year, and we will look forward to meeting you again in the next earnings call, one quarter from today. Thank you again for being with us.

Thank you very much. Ladies and gentlemen, on behalf of Datamatics Global Services Limited, that concludes this conference. Thank you all for joining us and you may now disconnect your lines.