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

Ladies and gentlemen, good day, and welcome to Datamatics Global Services Limited Q1 FY '22 -- sorry, Q1 FY '24 Earnings Conference call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Pratik Jagtap from E&Y, IR. Thank you, and over to you, sir.

Thank you, Karl. Good evening to all participants in the call today. Welcome to the Q1 FY '24 Earnings Call of Datamatics Global Services Limited. The results and presentation have been already mailed to you and it is also available on the website of the Datamatics. In case anyone has not received a copy of this release and presentation, please do write to us and we will be happy to send you all. To take us through the results today and to answer your questions, we have with us top management of the company represented by Rahul Kanodia, Vice Chairman and CEO; Sandeep Mantri, EVP and Chief Financial Officer; and Mitul Mehta, EVP and Chief Marketing Officer. Rahul will start the call with brief overview of the quarter on business, which will be then followed by Sandeep talking on financials. We will then open the floor for question and answer session. I would like to remind you that anything that said on this call, which gives 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, which you can find on our website. With that said, I now hand over the call to Rahul sir. Over to you, sir.

Thank you, Pratik and a very warm welcome, and thank you, everyone, for joining our quarter 1 FY '24 Earnings Call. I will briefly discuss some of the quarterly performance highlights, while Sandeep will provide an update on the financials. I'm happy with the overall performance of the business. We have started the year on a strong note with respect to both revenue and profitability. Our revenue stood at INR 391.1 crores, which is a growth of 19.6% on a year-on-year basis. Our EBIT stood at INR 58.6 crores compared to INR 39.3 crores in the same period last year. This translates to a growth of 49.2% in our EBIT, which is a very healthy growth. Although our revenues declined by 6.1% and margins by 3.1% on a sequential quarter basis, this is not a concern because quarter 4 always tends to be a strong quarter for us due to the cyclicality of some of our projects and quarter 1, the salary hikes kick in. In Q1 of FY '24, we added 14 customers, most of them are in the U.S. and the urban markets. On a year-on-year basis, our active pipeline has increased by 58% and 35% on a quarter-on-quarter basis. Additionally, we are also working on a few ASC opportunities, which we believe we are in a good position to win. Our strategy of focusing on hyperscalers is progressing well. We have deepened our relationship with Microsoft, Salesforce and AWS and have signed a new relationship with Cloud bodies, a company focused on low port development. These have started generating good opportunities for us. Artificial intelligence is transforming how we live and conduct our business. We have been investing in our AI capabilities and generally the AI has only redoubled those efforts. We are constantly incorporating AI into our technologies, operations and experiences business and as well as the product business. We are investing in establishing a robust AI center of excellence. The COE aims to enable enterprises to build and improvements their professional enterprise-wide AI road map. The COE has built multiple AI accelerators in automation, software coding, customer experience and employee experience to speed up AI implementation. We are also incorporating artificial intelligence in our operations across all 3 lines of business. In digital technologies, the team is implementing AI-enabled co-pilot development to improve productivity across all stages of software development life cycle. We have also enhanced our product TruBot and TruCap with generative AI. This will deliver enhanced benefits of automation and productivity for our customers. In digital operations, Datamatics has implemented AI in the enterprise document management domain. Today, Datamatics is processing 15 million annual report pages for global solidating agencies and analysis firms using AI-powered document processing. We see the opportunities to increase productivity across digital operations business. In the digital experience service area, the team has built an AI-enabled customer service chatbot for L1 and L2 support, delivering a high level of omnichannel customer experience. These initiatives reinforce our commitment to the customers to go deep in digital in the transformation journey. In conclusion, all the 3 segments are on a strong path and will continue to perform in the coming quarters. Due to the macroeconomic factors, we see some slowness in decision making on the customer side and we have factored it in when we had given a guidance of about 14% to 15% growth for this current financial year. Given the strong pipeline that we have, we are confident that as the year progresses, we will be in our growth momentum and the margins will be stable. With that, I will now hand over our call to our CFO, Sandeep Mantri. Sandeep, over to you.

Thank you, Rahul. Welcome, everyone, and thank you for joining us in Q1 FY '24 earnings call. Our quarter 1 FY '24 revenue was explained by Rahul, stood at INR 391.1 crores, which is a growth of 19.6% on a Y-o-Y basis and a decline by 6.1% on a sequential basis. Our consolidated EBITDA for this quarter was at INR 67.8 crores, which is up 41.8% on a Y-o-Y basis. Our EBITDA margin for the quarter is at 17.3% as compared to 14.6% in the last year's same quarter. On a sequential basis, however, there was a slight decline from 20.2% to 17.3%. Please note that full year EBITDA for FY '22, '23 was 16.6%, and we are in Q1, we are at 17.3%. So we are in line with our expectation. Our consolidated EBIT for the quarter was at INR 58.6 crores, which is up 49.2% on a Y-o-Y basis. EBIT margin was at 15% as compared to 12% in the last year same quarter. On a sequential basis, EBIT margin dropped from 18.1% to 15%, primarily due to salary increment and investment in products and development. Our other income on a consolidated basis stood at INR 9.1 crores, which is primarily grown because of exchange gain loss. Our quarterly paid after NCI was at INR 55.1 crores, which is a decline of 7.8% on a sequential basis and a growth of 26.9% on a Y-o-Y basis. Our tax rate for this quarter was in line with our expectation at 18.7%. If we talk about EPS, our EPS for the quarter was at INR 9.34 per share, which is higher than last year's same period, which was at INR 7.36 per share. Talking about segment-wise revenue performance. Our digital operations revenue was at INR 167 crores, which is a growth of 13.2% on a Y-o-Y basis. Digital operations EBIT margin was at 20.1% and its contribution to digital operation contribution to total revenue was 43%. Our -- when we talk about digital experience, the revenue was at INR 66.2 crores, a growth of 43% on Y-o-Y basis. EBIT margin was at 23% and contribution to total revenue was 17%. Digital Technologies revenue was at INR 157.9 crores, a growth of 18.6% on a Y-o-Y basis. Digital Technologies EBIT margin was at 6.2%. Last year, in the same period, if you remember, we were at negative 4.3%. So we have a marked improvement in the performance of Digital Technology business. The contribution of technology business to total revenue was 40%. We continue to maintain a healthy balance sheet. As of June 30, 2023, our total cash and investments stood at INR 555 crores compared to INR 498 crores in the last quarter. So we have added almost like INR 57 crores in our cash and investment. Our DSO was at 60 days as of June '23 as compared to 67 days in the last quarter, which is March '23. In terms of geographical footprint, U.S. remains our largest geography with 55% contribution coming from U.S., followed by India at 24%. Rest of the world including U.K. and Europe was at 21%. In terms of industry footprint, BFSI continues to remain the largest segment for us, which include 25% of our revenue, followed by education and publishing and Technology & Consulting both segments stood at 20%. Then manufacturing, infra and logistics was at 12%, nonprofit or nongovernment organization was at 10%. Retail contributed 9% of our business and other segments are 4% of our total revenue. If we talk about client concentration, it is very healthy with top 5, 10 and 20 clients contributing to 25%, 38% and 52% respectively. So these are the financial update. With this, I will now pass on the call to operator to open the floor for questions. Thank you for your patience and continued interest in Datamatics. Thank you very much.

[Operator Instructions] The first question is from the line of MK Reddy from MR Investment.

Yes. Thanks for the opportunity. Sir, my first question is regarding is product business. When I look at the global companies, they spend R&D around 15% to 20% in sales and marketing, up to 40%, but we are conservative in spending our product development business as we guided in the previous calls INR 40 crores to INR 50 crores. Just want to understand whether we are spending less when compared to global PS or is there any cost advantage we are getting because we are based in India? That's my first question.

No, we are not spending less. We were -- it was very important to get a core set of initial clients and that's what we are doing. We've announced our product substantially. Now we've incorporated generative AI into the product as well. This year, we're very confident that we will have a good run because we've signed up some very marquee logos. If you may recollect our previous IR calls, we did say that additional revenues that flow in will be invested in sales and marketing. So we will increase the sales and marketing spend as the revenues grow and sort of being more in line with the other competitors in the industry.

Second question is regarding the -- when I looked at the presentation, there was no information regarding the fixed price projects and time and material contracts. Is there any update -- is there any update regarding this?

I didn't follow the question. You were asking something about fixed price and time and material, but I could not...

How much of our projects are fixed price and how many of our contracts are time and material contracts, that is my question?

We don't keep that data in our -- right now, we have not started keeping the data for investor call for obvious reason. So we will continue with the same position. We will not disclose this data of time and material and fixed price, but we will see later on the...

But I don't have an exact number to give you, but I imagine it's a decent balance between the 2, but I don't have the number handy.

Yes. My last question is regarding this many of the global peers are moving from in product business, moving from license base to fast racing models. For example, if I look at Temenos, they are -- 100% of their offerings are not SaaS-based. So they are not selling any more license and license-based licenses. Just want to know what is our contribution in product business, which is 40% of our revenue. How much is regarding this license? And how much is we are receiving from this subscription base revenue?

So our product business is not 40% of our revenue, that's not correct. We by and large don't disclose the specific revenue stream from products. Having said that, we do not do licenses, all our things are on what it is called subscription basis. So it's an annual subscription. And today, all our products are on SaaS model. So they are hosted, and customers use it as a hosted service. So the entire platform is SaaS, and it is an annual subscription, not a onetime license.

Okay. And when you SaaS that how much is the sales cycle is long in implementation cycle?

Sir your line is not clear. Could you repeat that please?

Yes. In our product business, whatever our typical deal size and sales cycle? How much implementation cycles is? How much time it takes, yes, from products being, licensing products to go live?

So the product to go live from the time of deal closure is about like 2 weeks. So that's not very long. But many -- very often, these are 3-year deals. So it gives you a steady revenue at least for the foreseeable 2 to 3 years. The deal sizes have started increasing. Earlier in the initial period, they should be in the range of about $50,000, $60,000, then it went up to about $100,000 to $200,000. Now we're getting deals at about 0.5 million. One-off cases, we also get $1 million, $1.5 million deals. So we are steadily seeing the deal sizes increasing, which is a very, very healthy sign. Some of the logos that we've signed are absolutely marquee logos global fortune companies. And those companies have deep pockets. So I'm sure that once we engage with them, those deal sizes will increase.

The next question is from the line of Deepak from Wizard Investment. [Operator Instructions]

Can you hear me?

Yes.

Would like to understand, when you say this year, we will have a good growth compared to industry. What gives us confidence that this year, we will have the growth? And second question is the March was an abrasion in terms of performance or going forward, we will have sort of similar margin, et cetera?

Sure. So let me answer the second question first. So every year, our quarter 4 tends to be higher because we have some elements of seasonal business. So because the seasonal business kicked in, in quarter 4, for us, Q4 is always higher than, say, Q3 or Q1. There's always a slight dip in Q1 compared to Q4 usually. Last March was a little higher than normal, but nevertheless, it was healthy. And therefore, you see Q1 a little subdued compared to a -- little muted compared to Q4. However, if you compare to year-on-year, we had a 19.6% growth on revenue and a 49.2% growth on EBIT. Now to your second -- or your first question on what gives us the confidence. You see our pipeline of deals has grown 60% almost from Q1 of last year. And if you see on Q4 last year, it's grown 35%. So this pipeline has grown extremely well. And that gives us confidence that we will certainly hit our numbers, it's not even so faster. Even in Q1 so far, we've grown 19.6%, which is quite early given that we were looking at a 15% growth for the whole year.

And even our Q1 EBITDA -- EBIT margins are higher than the last year, full year average. It is almost 1% -- approximately 1% higher than last year average.

Yes. And within segment, which segment we think will have a higher growth and which segment will have lower growth? And whether the last year average margin is maintainable this year or we will have some upside because of the scale and...

So I think as the year progresses, all the 3 segments will have more or less similar growth. The margin, which was there last year, I think we will maintain or improved slightly on the margin thing for this year for FY '23, '24.

So if you see the investor deck, which you may or may not have right now, our Digital Experiences have the highest growth in 43% in percentage terms followed by Digital Technologies and then followed by Digital Operations. I do believe that our Digital Technologies will be very healthy for the year. In terms of margins, as Sandeep Mantri mentioned, we should see a stable margin, in fact, slightly better. So we should improve over last year, for sure.

One last question, if I may ask. On the Digital Technology side, we are growing good and we are focusing a lot. So any new product, which -- where the -- it is by which we can have a good revenue bump up?

So not from us because we are still largely a services company. As I mentioned in my address that we are focusing on the hyperscalers, which is Microsoft, Salesforce and AWS, and we've seen a very good pipeline coming from that area. So we expect that to drive the growth for this year. On a long-term basis, we will also see AI kicking in, but this is too early because AI is still being explored in the world. Whole world is sort of figuring out what to do with it.

[Operator Instructions] The next question is from the line of Ramesh Bajaj, an individual investor.

So I have 2 questions. One is related to the ASC business. So can you all throw some light on the ASC business?

So the ASC business, we have gone live with the Line 2A and Line 7. We will now -- we started working on Line 2B. These are deals that we have won recently. In terms of the pipeline, we have 2 or 3 large RFPs coming in. We will be bidding for them and we are very confident that we'll win some of that for sure. We can't predict right now because it's too early, but I know we are participating and we will certainly close some deals. So that is also looking very promising.

Sure, sure. And the second question is related to acquisitions. So any plans of acquisition in the coming months?

We are in dialogue with some prospects and target companies. None of them have matured to the level or stage where we need to make any announcement. But yes, we are in dialogue with a few companies for acquisition.

[Operator Instructions] The next question is from the line of MK Reddy from MR Investment.

Sir, how many of your products are in development stage? We have 6 products mentioned in the presentation. Are these products development and testing phases completed? Now we need to ramp up our in-house sales and marketing things. I just want to know within our product, how many of them are still need to be -- how many products we need investments and how many products have development is completed and we need to ramp up the sales and marketing in wholesales and market teams?

Yes. We -- all our products are already developed. We have the TruCap+, TruBot, iPM, TruBI and TruFare. So now the investment in them is going on 2 counts. One is incremental enhancement with newer technologies. So there's always new technologies. We are right now talking about artificial intelligence. So that keeps getting incorporated into these products. So that's one area of investment. The other is, of course, as you rightly pointed out, sales and marketing. So this year will be a lot more focus on sales and marketing because that's really what will drive revenue. The products are ready. The coverage we have received from analyst firms like Gartner, Everest, Forrester, these kinds of companies, it has been excellent. They've given us some very good ratings. Our customer feedback from these products also has been excellent on the basis of which we've bumped several marquee logos, as I mentioned. So I'm very positive that it will see a good revenue stream in the years going forward. So to answer your question on, a lot of the investment is done. Incremental improvement will keep happening and the focus will be on sales and marketing.

Yes, that's very helpful. Again, sir, appreciate for the reducing the DSOs, which is 60 days in Q1 FY '24. My question is regarding the ASC, sir, automatic sale collection platform, which last year contributed 6% to our revenue. How do you see the margins and working capital is involved in this product -- in this platform when your sell it in India and now we are aggressively trying to sell in foreign international markets? I just want to know in terms of ASC in terms of margins and working capital?

So the margins, as I mentioned in one of my earlier calls, we chose to go very aggressive with our pricing because we wanted to capture a significant market share. That strategy was well executed. We have -- today, I must say that Datamatics is in a fourth position, and we are a dominant player in ASC in India. So we -- our objective and strategy worked well. Now we are looking at a more correct pricing. Of course, we still remain need to be competitive, but our margins will improve because we are now correcting the pricing versus going aggressive, point one. Point two is that we have started focusing a lot more in the international markets and we've got a good pipeline coming in there as well. The international margins tend to be much better. And therefore -- and of course, you have the natural advantage of our dollar revenue versus a rupee revenue. So that gives you a benefit. In terms of working capital, it does consume a fair amount of working capital because these are semi-public sector kind of projects, and they're milestone-based billing, so the working...

So only I think working capital is consumed in the -- we are not able to -- sometimes we are not able to bill because of this milestone. Once we bill, then normally, these fare collection companies pay well in time -- well within time. We have not experienced any delays in collections. The only issue with this last contract is basically milestone billings, which will remain, I think, at least for India part.

Very helpful. My last question is regarding Digital Technologies. For this quarter, we reported around 6.2% EBIT margin. When I looked at some of these product companies they are having almost 25% to 30% of margin in matured companies like Oracle listed in India, they are having more than 40%. Just wanted to know when our investments will be certified and when will you reach this at least 25% margins from current from current 6.2%?

So as we Rahul explained earlier, this is not a completely product -- when we talk about Digital Technologies, it is a product plus services and services are substantial portion of the revenue. So you -- we really can't compare with product company as of now because our product revenue contribution in the whole Digital Technologies is not so large and therefore, we need to see Services Company. Second is that we are investing money in these R&D and sales and marketing of product, which is also, to some extent, compromising these margins, and that's why the margins are low.

So on the product that we talked about, we just TruCap, TruBot, iPM and things so, we talked about an investment of INR 40 crores to INR 50 crores. That is what we are "bleeding." They'll be losing the money. So whatever new money comes in from revenues, we will spend on sales and marketing, then we'll maintain that INR 40 crores to INR 50 crores figure actually for the next 2 to 3 years.

[Operator Instructions] The next question is from the line of Saurabh Shah from AUM Fund Advisors.

Question was regarding the new business from the hyperscalers. Rahul, just wanted to understand the product proposition from Datamatics standpoint for these hyperscalers. And if you could give us sense of given the product and the future, how do you expect to see their wallet share of this market for you? So you get a sense of what's the growth kind of possibilities over here, given that's not the large spaces you're targeting?

I follow the first question, I'm not sure I follow the second. Let me answer this anyway, then you can ask your question again, perhaps. So on the hyperscalers, which is focusing on Microsoft Power Apps, Salesforce, AWS, low code, no code. These are hyperscalers because it has a rapid growth. These pockets tend to grow at a substantially higher rate than the traditional IT services. If you look at traditional IT services you're talking about, 2%, 3%, 4% growth, even maybe 6%, 7% on the higher side. These hyperscalers are growing at about 30%, 40% a year. So therefore, in some very small pockets might even hit 50%, 60% growth. So our strategy was to focus on these high-growth areas because that is for the rest of the company. The traditional legacy IT services is not the most exciting from a growth perspective. So right now, the focus is on hyperscaler is still a small footprint. Our current footprint is not very large. And therefore, you don't see the total impact on our growth, although we are still growing in the IT space or digital technologies at 18.6% for this quarter, which is still a healthy growth. But with the hyperscalers kicking in, I expect that growth figure will be higher. As far as the second question is concerned, as I mentioned, I didn't really follow it. So if you could sort of ask that again, I would be happy to answer.

Sure. So the question was, I think, a follow-up to what you just mentioned in terms of what's the current size with these hyperscalers? And you mentioned that you just now have a small footprint. So should we expect, for example, Datamatics own revenue to grow in this 35% to 40% growth that you have to scale currently experiencing? And what does that do to you? In a sense are you looking to get more market share and give us some sense of the competition that you face while accessing this opportunity?

Yes. So Datamatics, of course, will not -- all of Datamatics is not in this hyperscaler space. So therefore, the overall impact will not be at a 30% growth. Having said that, these pockets are growing very rapidly. So Digital Technologies is one area. And within the Digital Technologies, we have the focus of hyperscalers, we have ASC, we have robotics and intelligent document processing. And then we've got some of the cloud and digital transformation services also -- business -- digital business operations and things of that. So these are all pockets within the Digital Technologies. Some of these pockets are growing very rapidly and that's where we want to focus on. In terms of Datamatics, I think you'll see in about 1 year, 1.5 years, of course, assuming we don't have any macroeconomic challenges, I think we see a fairly healthy growth coming in. As I mentioned, we are getting some good marquee logos. Now in terms of competition in the space, we are seeing competition of all the big guys, they're all there. But because these space is growing fast, the demand is high, and therefore, we are able to capture a few good opportunities. Our initial pipeline was extremely promising and we did come across some very good-sized deals. Size is in the range of even $2 million or $3 million. But there, of course, is still a pipeline. So we are seeing good-size deals, and we're seeing not as aggressive competition just because there's a latent market that's just absorbing every opportunity we can.

And maybe the last follow-up is within Digital Technologies, how much would the hyperscalers be as a percentage within that segment?

I don't have that big handy. I know it's a small footprint, but I don't have the number handy with me right now.

[Operator Instructions] The next question is from the line of Shreya, an individual investor.

My question is about the customers. So we have heard that you have lost some major customers in this quarter. So can you just give some clarity?

No. So there was some kind of a false rumor and a false alarm that I don't know how that triggered. We did on that, give a clarification to the stock exchange. And I was on ET now as well to understand. So we've not lost any major customer. Everything is business as usual. It was some kind of a false rumor that was there for some reason.

Okay. Okay. And one more question I have is about the AI market. So how do you see at AI market? And what are the opportunities?

The AI market is very vibrant. It's growing globally at about 40% CAGR right now. The world is investing very heavily in AI. But at the same time, there's a lot of fuzziness and conclusions in terms of the direction because there are no very clear solutions that are come out yet. So these are all initial early days where there's a lot of exciting technology that's coming out, but people are still grappling with how to deploy it in the enterprise. In the consumer market, it's a little easier because it's not very critical to be absolutely accurate. But then the enterprise, you've got to have very high precision and that why there is some degree of lack of clarity in the global market in terms of the solution. Having said that, Datamatics has developed several accelerators, we've successfully piloted them. We are now taking them to our customers. And once we take it to our customers, we'll see what traction we are getting. But it looks promising. I think if you're looking at a 3- to 5-year horizon, AI will make a huge difference in this world of technology. Right now, it's not going to give you a result quarter-on-quarter basis. But the 3- to 5-year horizon will be important to look at. So I think we are well interested and we've got a good team that's working in several areas in the world that we are.

[Operator Instructions] As there are no further questions from the participants, I would now like to hand the conference back to the management for their closing comments. Thank you, and over to you, Rahul.

Thank you, everyone, for participating on this quarterly call. I really appreciate the questions and answers and the interaction we've had. I do hold the power to meeting you again next quarter. And if you have any other questions, please feel free to reach out to any of us, and we'll be happy to give you more insights. Once again, thank you very much and look forward to engaging with you again.

Thank you so much.

Thank you very much on behalf of Datamatics Global Services Limited, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.