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

Ladies and gentlemen, good day, and welcome to Datamatics Global Services Limited Q1 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pratik Jagtap from E&Y Investor Relations. Thank you, and over to you, sir.

Thank you, Steve. Good evening to all the participants in the call today. Welcome to the Q1 FY '25 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 Datamatics. In case anyone has not received a copy of press release and presentation, please do write 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 the top management of 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, and then we will open the floor for Q&A session. I would like to remind you that anything that is 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.

Thanks, Pratik, and a very warm welcome, and thank you, everyone, for joining our earnings call for quarter 1 FY '25 today. I will briefly discuss some of the key quarterly highlights, while Sandeep will provide an update on the financials. After that, we will open the floor for Q&A sessions. Our total revenue for quarter 1 stood at INR 394 crores and an EBIT of INR 42.6 crore, including revenues from Dextara. Our revenues grew 0.7% in quarter 1. Dextara contributed to 3.1%, hence, our organic growth was being negative 2.4% on a year-on-year basis. The degrowth was mainly due to the slowness in the U.S. and European markets and a flat growth in our existing business. Consequently, our EBIT margin reduced to 10.8%, which included increments that we gave out for the year '24-'25 rolled out in quarter 1, and our ongoing investments in building AI solutions. On a sequential quarter basis, we see an improvement in EBIT for Digital Experiences, which grew from 11.8% in quarter 4 to 14.2% in quarter 1, an improvement in EBIT for Digital Technologies, which from 0.7% in quarter 4 to 4.6% in quarter 1. However, there was a shrinkage in EBIT for Digital Operations from 23.5% in quarter 4 to 15.5% in quarter 1. This is not very comparable on a sequential basis due to the cyclical nature of this business. Although our financial performance has been somewhat softer than expected, our confidence in the overall business strategy is steadfast, we remain fully committed to this path. Our business continues to progress according to plan. Datamatics is expanding its delivery centers in Philippines. We recently opened a delivery center in Dumaguete, and we are opening another delivery center in Cebu in quarter 2. In our product business, we integrated Generative AI technologies in TruBot, TruCap and TruBI and have rolled these features out to all existing customers. Furthermore, these products were listed on the Microsoft Marketplace in quarter 3, and we have sold over $1 million of licenses on this platform. Regarding our recent acquisition of Dextara, a summit level partner for implementing Salesforce, I would like to inform you that the integration is progressing well, and the teams are collaborating actively on new opportunities. We have submitted 10 new proposals in quarter 1. This quarter, we expanded our client portfolio by adding new -- 9 new customers, including a Fortune 500 company. Transport and logistics is a focused vertical for Datamatics across all our lines of businesses. We have 15-plus customers in this segment. In quarter 1, we added another U.S. logistics customer to this list. We have aligned our organization structure and processes for higher growth going forward. As I mentioned on the last call, we are excited about the opportunities that artificial intelligence presents. Recently, we became one of the first digital technology companies worldwide to receive an ISO 42001:2023 Certification for AI Management Systems. This achievement will help our customers manage the risks and opportunities associated with AI, balancing innovation with governance. We have recently received a patent for AI in TruCap. This further solidifies its position as a leading intelligent document processing solution. Microsoft, along with OpenAI, is leading the charter in the AI in the enterprise today. Along with Microsoft, we are co-creating and reimagining applications using the power of AI. One notable development is a partner onboarding Copilot developed by Datamatics, which is amongst the top 3 Copilots featured at Microsoft Build Annual Developer Conference in Seattle, Washington. Additionally, Microsoft recognized Datamatics as AI First mover in the recent publication highlighting the recognition of our AI solutions are receiving from the industry. I'm excited to announce the groundbreaking AI initiatives that our team has successfully secured a leading American supermarket chain. This project entails the implementation of advanced AI-driven video monitoring and analytics technology across 250 locations, aimed at enhancing customer experience while simultaneously migrating instances of fraud -- mitigating instances of fraud. To date, Datamatics has delivered over 40 AI projects across various verticals. Looking ahead, we are positive about regaining our momentum with anticipated improvements in both revenue and growth, revenue growth and profit margins. Regarding our EBIT margins, through diligent cost management and operational efficiencies, we project an EBIT improvement of 150 to 200 basis points in quarter 2. Before handing over the call to our CFO, Sandeep Mantri, I would like to express my heartfelt gratitude to Sandeep Mantri, on his last earnings call with us. His dedication, leadership and financial acumens have been instrumental in guiding our company in achieving significant milestones. Sandeep, your contributions have laid a solid foundation for our future success, and we are deeply grateful for your commitment and hard work. On behalf of the entire Datamatics team, I wish you all the best in your future endeavors and look forward to your continued success. Thank you for everything. Sandeep, over to you.

Thank you, Rahul, for the kind words. Welcome, everyone, and thank you for joining us in quarter 1 FY '25 earnings call. Let me start with the financial performance for the Q1 of FY '25. Our revenue for this quarter stood at INR 394 crores, which is a drop of 4.5% on a sequential basis and a marginal of 0.7% on a Y-o-Y basis. Our EBITDA for this quarter was at 13%, compared to 17.3% in Q1 of last year. So there is a significant drop in EBITDA. Our EBIT for this quarter was at 10.8% compared to 15% in Q1 of last year. As explained by Rahul, the reason for drop in operational profit is primarily due to slow revenue growth, increment for '24-'25 effected in Q1 and our continued investment in AI project. Our tax rate for the quarter is 17.2%, compared to 18.7% in Q1 of last year. Our EPS for the quarter was INR 7.37 per share, compared to INR 8.9 in Q4 and INR 9.35 in last year Q1. When we see segment-wise revenue performance, our Digital Operation revenue was at INR 164.8 crores, which is a drop of 1.3% on a Y-o-Y basis. Digital Operation EBIT margin was at 15.5%, total contribution in revenue was 42%. Our Digital Experience revenue was at INR 67.9 crores, which is a growth of 2.4% on a Y-o-Y basis. The EBIT margin was at 14.2%, and its contribution to total revenue was 17%. Our Digital Technologies revenue was at INR 161.3 crores, which is a growth of 2.2% on a Y-o-Y basis. EBIT margin for Digital Technologies stood at 4.6% and the contribution of Digital Technologies to total revenue was 41%. We continue to maintain a healthy balance sheet. As on June 30, 2024, our total cash and investments stood at INR 589 crores, and our DSO for -- as of the end of this quarter was at 61 days. In terms of geographical footprint, U.S. remains our largest geography with 54% of our business coming from U.S., followed by U.K. and Europe at 13% and the Rest of World, including India, is at 33%. In terms of industry footprint, technology and consulting remains the largest segment for us, which constitute 27% of our revenue, followed by BFSI, which stood at 25%, then education and publishing and manufacturing, infra and logistics, each at 12%, then noncorporate or nongovernment organization at 10%, retail at 9% of our business, other with miscellaneous is 5% of our total revenue. Our client concentration remains very healthy with top 5, 10 and 20 clients contributing to 23%, 37% and 50%, respectively. As this is my last earnings call with Datamatics, I want to take a moment to express my gratitude. It has been an honor to serve you as your CFO and to work alongside such a talented and dedicated team. I want to thank our employees for their unwavering commitment, our investors for their trust and support and the entire leadership team for their collaboration and guidance. Together, we have achieved many significant milestones. I am confident that Datamatics is well positioned for continued success, and I look forward to seeing the company's future accomplishments. A special thanks to Rahul for always believing in me and trusting me, and thank you all for the incredible journey. With this, I will now pass on the call to operator to open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of Grishma Shah from Envision Capital.

I just wanted to understand the softness in growth a little better. I mean, as evidenced, we can see some pain in the top 5 and the top 10 accounts. So if you could tell us how is the trajectory going to be for the rest of the year with the key accounts? And where is the growth going to come from your own for -- and what's the guidance for the entire year?

Sure. Some of the -- so on the Digital Operations side, there was some delay in the shrinkage in the volume. We expect some of the volume to come back in Q2 and Q3 of this year. On the Technology side, certain projects got a little pushed out. And again, we expect that to happen in Q3. So overall, from a growth point of view, in the last earnings call, we talked about 4% organic growth and another 3% now to 4% from inorganic. And we, at this point, maintain that projection. So I think we should be in that range once we got back some of the volumes and some of the deferred projects kick in.

Okay. Yes. Yes. I get that and you know how has Dextara grown for this quarter year-on-year basis? And what's the outlook for Dextara?

Dextara is flat. Dextara this quarter has not grown. But that does not concern me because our strategy behind Dextera was -- and we had a call for Dextara specifically when we acquired them. So they, as a company, because they were much smaller or bidding for smaller deals, ranging between 50,000 to 100,000, and the deals that Datamatics was getting -- was ranging between $0.5 million to up to $3 million per deal. So our strategy behind that was with their competence and expertise, we will convert a few of the larger deals that we are getting, and that will give the upside in terms of growth. Now in quarter 1, it's very difficult to close the deal so fast. I mean that's too short a period. So they have been working very closely with our team. And as I mentioned, we've submitted 10 proposals in Q1 of this year. So I'm actually very positive about their ability to close a few -- 1 or 2 large deals, and that will get the growth going for Dextara.

You paused the small deal growth that Dextara was traditionally doing...

We've not paused it. But yes, quarter 1 is a little soft. So they have been working on several deals. So we've not paused these small deals, but the upstream will come when you sign 1 or 2 large deals, and we have that pipeline from Datamatics.

Okay. And have we disclosed the total pipeline this quarter? Where does it stand at?

No, our pipeline last quarter was about $200 million. We've seen the softness. So that's come down to about $170-ish million.

Okay. And how much of these increments that you've rolled out in quarter 1 will continue in quarter 2 and ongoing investments? Can you give me some margin outlook for the entire year?

Yes. The increments that we gave on an average was roughly about 9%, 9.5%. And obviously, when you give that increment, it's stayed through the whole year, it goes up and down a little bit depending on churn. Some people leave, some new people come, but roughly 9.5% will stay through the whole year. But all our services companies, IT companies go through those motions when then they tighten the belt, they churn some staff and then it sort of comes back to normal.

Sure. Yes. And overall, I mean, if Q2 is going to see the margin recovery, do you see the trend of recovery continuing to the subsequent quarters? Or what's the sense?

Yes. The subsequent quarter should see the trend continuing. The reason is that, as I mentioned, some of the volume that came down in Digital Operations will kick in, in quarter 2 and quarter 3, and also some of the projects in the IT, which have pushed out to quarter 3. So they will kick in. And the moment you get the revenues coming in, the margin by default improve because the cost structure does not move. Q4 for us always tends to spike a little bit. So Q4 will always be healthier than the other 3 quarters. So quarter 2, 3 and 4 should be better than quarter 1.

Okay. And there is an exceptional item of INR 3 crores in the P&L.

Yes, it's correct.

So that is the amount we paid toward acquisition of Dextara to the adviser who helped us in getting this deal.

Okay. So that is the exception and not sitting in the operational costs.

That is not operational.

Yes. That is a onetime cost, yes.

The next question is from the line of Nikhil from Kizuna Capital.

Sir, I just wanted to ask you the organic degrowth that we had, can you quantify them in terms of -- [indiscernible] softness in demand incremental -- increments and investment in AI?

We don't have that breakup now. We think what is the impact of increments, the impact of AI and the impact of the software, the breakup of that. Is that correct?

Yes.

Yes. I don't have that handy. I think...

Increment will be having about 9%, 9.5%, which means about 4%, 4.5%. Almost increment is one of the major reasons. And coupled with the sluggish revenue growth, both have actually brought down the EBITDA a little bit.

Sir, the revenue growth would have been...

Then we would...

Then you would have not -- bottom line, would have been much...

Even with 6%, 7% revenue growth, we would have better in terms of [ EBIT ].

Okay, sir. And sir, any earnouts triggered during this Dextara acquisition, like there was a performance-based payout that was going to be triggered.

That will happen at the end of the year. First payment will be at the end of the year and second payment will be after 31st March '26. So this is a 2-year deal post earnout.

Okay, sir. And then in terms of pipeline of $117 million. So sir, can you bifurcate them into the verticals, like how much in the AFC, how much in the product side? And in which vertical like BFSI manufacturing?

Yes, I don't have [ batch ] breakup right now. But...

We don't give segment-wise bifurcation of pipeline. In fact, we started giving pipeline last to last quarter only. So right now, we are not giving segment-wise, what is the pipeline because many of the places, what is happening, some are combined deals. So it is very difficult to figure out which segment it in hybrid deals basically. We are looking more and -- we are seeing more and more hybrid deals.

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

[indiscernible] that the personnel costs have increased in the first quarter is the reason. So do I understand that this phenomena will happen every year and the quarter 1 will show the impact every year like this? And second thing is, what is...

Your voice is very unclear.

Is it more clear now?

Not really. It's a little louder, but not necessarily clearer, but maybe you can just continue and maybe we can understand...

Okay. Okay. So my question is that the personnel cost phenomena is not a new phenomena. It will be there in every quarter. Every year, it would be there. So if we are targeting the revenue growth, what are the new verticals and markets we are scouting for? And the second question which I just want to understand is, the AI and technology is quite a thing which is dependent upon R&D. And there has been huge inflow in different R&D organization across the world. So how we are keeping pace to be ahead of all these technological advancements? So these are the 3 questions that I want to ask.

So to your first question, yes, that is not a new phenomena. However, the growth particularly was sluggish. And when you have growth, it absorbs the increase in costs very easily. Unfortunately, because we didn't have the growth in Q1 of this year, the cost absorption was not at the same level. I am confident that as we go through the quarters, the growth will come in, and we should be able to absorb the cost. Having said that, we've already tightened our belt, and we are already seeing results of that tightening of the belt in the first month of Q2, which is July. To your point about AI and how we are keeping abreast. We are very plugged in with the R&D team that we have. We have a whole team under data labs that does a lot of R&D in the space. We are working very closely with Microsoft and with Google, and we are actually building cutting-edge technology, basis which Microsoft has covered us in their profitable book as an early adopter of AI. Also, they showcased Datamatics in their head office in Seattle, Washington, as 1 of 3 companies globally from an AI ISV point of view. We also got the ISO Certification for AI. So all of these things that we are doing, and also I talked about a very interesting project around video analytics that we got, which is a project that we signed up and we will roll it out across 250 locations. So this is all, I think, testimony to the kind of work we've done on AI. And the R&D team, I must say has done some very cutting-edge stuff. So we will start seeing the benefits of all of this that we've done in the coming quarters.

And I extend my warm wishes to Sandeep also for his new endeavor we have seen the company from -- like I've been tracking it from last 1, 1.5 years and it's been phenomena to see good leaders in the industry.

[Operator Instructions] The next question is from the line of Nikhil from Kizuna Capital.

Sir, I just wanted to ask you about the AFC pipeline, like how are you approaching the AFC deals? Like those are the large deals that you talked last time.

Yes. So on AFC, we have just kicked off Line 2B. Line 2B was delayed for a variety of reasons with COVID and all that type of stuff, but that we just kicked it off. We are currently a bid for Pune Metro, and we are awaiting the results of Pune Metro. I am confident that within the next 1 month, we will get the results for sure. So in Q2, we'll get some visibility to where we are on Pune Metro. We are looking at some other lines that are coming in, in Mumbai, Line 9, Line 4, 5 and 6. So as we go through the motions, we will give an update on that as well. Plus in addition to that, we are pivoting a little bit more into the U.S. So our sales team has now started focusing very actively on the U.S. market in this space.

[Operator Instructions] The next question is from the line of Pallavi Deshpande from Sameeksha Capital.

You mentioned about Mumbai Line 9, 4, 5 and 6, when does that come up? And in terms of the U.S. that you're pivoting into, it's just the first time we will be looking for contracts on this end?

So no, in the U.S., we have done Memphis as a project. We have done a small project with San Diego. But now we've got a sales team in the U.S. that is looking at many other opportunities in the U.S. So we've done U.S. projects before, and I'm very confident we'll be able to deliver on those. As far as Line 9, 4, 5 and 6, the tenders have been processed. We will now be working on those tenders, and we will probably submit some of them in the next 2 months and probably a quarter after that. So really, you're talking about Q3 where we start seeing some results which was materialized.

And the profitabilities for this -- in India versus the U.S., how will they be different?

Yes. So that is a concern. India is a far more price-sensitive market and profitability is lower. And that's the reason why we are focusing more in the U.S. We've also hired a Global Head of Sales in the U.S. We're looking at the AFC business in the U.S. as well. So increasingly, we are focusing more on the Western markets. Europe is right now a little sluggish because Europe is -- because of the Ukraine war, the inflation and things like that, there is a problem in Europe, but the U.S. is still looking good. The current -- there is some degree of uncertainty because of the election is coming up. We don't know which way it's going to go. But outside of that, the economy seems to be doing quite all right. There is slowness, which we see more in terms of decisions being deferred. And that's the softness that we've seen and projects are getting pushed out. But on a little longer-term 6 months to 1 year, 1.5 years, I don't see too much of a trouble with the U.S. market.

And sir, lastly, any other plans on the acquisition -- on the pause on acquisition side?

So we are in dialogue with some companies. Nothing that is at the serious level that I would like to announce right now. But as those mature, we will certainly go through the motions of having a Board approval, informing SEBI and things like that. So yes, so we are in dialogue with some companies, but nothing right now that needs to be announced.

[Operator Instructions] The next question is from the line of Nikhil from Kizuna Capital.

According to my understanding, so our next margin levers are going to be the revenue growth and revenue growth only, right, sir?

Sorry, say that again, please?

So our next margin levers that is going to go to the bottom line. It's going to be the revenue growth, right, sir?

That is right.

Not only revenue growth, we are tightening our belt also. So that also will give some sort of market improvement.

Some cost control and revenue both. It's a combination.

So sir, if you want to guide, what will be the exact margin for FY '25?

For the full year?

Yes, sir.

We -- right now, we are guiding only Q2 for margin, which will be about 150 to 200 basis points.

So if you look at the current one, we talked about 10.8% as an EBIT level. We improved 2 basis points -- 200 basis points, you're talking about 12.8...

12.5 to 12.8x.

So I think we'll maintain a 12 to 13 range for the year.

As there are no further questions from the participants, I would now like to hand the conference over to the management for the closing comments.

Thank you, everyone, for being on the call today. It's a pleasure talking to you, and I look forward to speaking to you again at the end of quarter 2. I'm sure we will have better results to talk about and we should be back with the growth momentum. Thank you once again for being on the call.

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