MPS Limited (MPSLTD) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '25 Earnings Call of MPS Limited. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Rahul Arora, Chairman and CEO. Thank you, and over to you, sir.

Thanks, Steve. Good evening from Singapore, and a warm welcome to our Q3 FY '25 earnings call. Today on the call, I have with me Prarthana Agarwal, CFO of MPS Limited; David Goodman, Managing Director, MPS North America; Archana Jayaraj, Chief Operating Officer, MPS Interactive and MPS Europa; Naren Kumar, CTO, MPS Limited; Tony Alves, Senior Vice President and Head of Product Management at HighWire. Prarthana joins us from our corporate office in Noida; David from Austin, Texas; Archana from Dallas, Texas; Naren from Bengaluru; and Tony from the Greater Boston area. This global representation underscores our commitment to serving our diverse stakeholders across the world. Prarthana will kick things off in our opening segment today by discussing our financial performance. Then David will update us on Content Solutions development, with an emphasis on the education business. Archana will discuss the rapid transformation in our eLearning business. And next, Naren and Tony will then follow up on the impressive progress made at MPS Labs and our platform business. Finally, I will provide an update on the outcome of our Board meeting held earlier today before opening the call to questions. Let's keep going. Over to you, Prarthana.

Thanks, Rahul. Q3 FY '25 delivered a strong start to the second half of the FY. We recorded revenues of INR 185.52 crores on an FX-adjusted basis, representing 38.19% year-on-year growth. EBITDA margins improved to 32.38% in Q3 FY '25, and overall EBITDA grew by 35.17% in Q3 FY '25 compared to the same period last year. Reflecting on the quarter, I would like to highlight 3 strategic achievements. Our top 15 customers now contribute to 58% of our revenue, a much lower customer concentration than when we started this journey in 2012. In line with our strategic interest, the geographical diversity of the business is also improving. For example, North America is now 45% of our revenue, while Rest of the world, which is majorly APAC, is now 30% of our revenue. Revenue quality is improving, with platforms responsible for 28.56% of the consolidated revenue. I want to hand it over to David to discuss the developments in our Content Solutions segment.

Thank you, Prarthana. Revenue in the Content Solutions business grew by 38.7% in Q3 FY '25 compared to the same period last year. That growth was driven by the acquisition of AJE, continued expansion of the Journals business and strong upward momentum in the global education business. I joined a little over a year ago to lead the U.S. operations of MPS, and 2 main factors have contributed to the revival of the education business: operational efficiency and strategic business development. We took purposeful intent to our diverse teams across the U.S., Doon, Chennai and Noida offices and alignment to create a global education practice. This led to numerous cost efficiencies as the U.S. team took better advantage of the opportunities we have offshore. Additionally, some strategic cost reductions were needed to bring the investment in the U.S. down to a sustainable level to match the actual requirements of the business. From a business development standpoint, the team built above its foundational structure, and best practices were set as table stakes. We sponsored premier education events, implemented stronger marketing and branding, took a more strategic and governed approach with STAR Accounts and modernized our go-to-market strategy and approach. All these efforts led to substantial growth in our pipeline and an improved win-loss ratio. We also just signed a 3-year minimum volume agreement with a key client, which will serve as the model for other accounts. To sustain this momentum, we must continue to perform the maximum amount of work possible offshore to maintain our margin targets and allow for investment in strategic initiatives. Growth will come from STAR Accounts. We will also continue our efforts to build the pipeline with new opportunities through more rigor in executing our marketing strategy. I would like to now hand over to Archana to discuss the impressive progress made in our eLearning business.

Thanks, David. I'm pleased to report meaningful improvement in the margin profile of the eLearning business. EBITDA margins in the eLearning business came to 32.63% in the quarter. In the India entity, MPS Interactive Systems, revenues were ahead of our internal estimates, and EBITDA margin crossed 28% in the quarter. And while the business is still not back to previous levels, it is reassuring to note that we are ahead of our turnaround schedule and have achieved our profitability goals. The main drivers of margin expansion in eLearning include strategic rightsizing efforts, optimizing resource allocation and gravitating towards a more flexible delivery model using outsourcing and gig workers. Operational efficiency improvements such as enhancing billable utilization, addressing project overruns and improving yield rates with customers have contributed to cost optimization and margin growth. A key focus has also been on reducing the overall cost per resource while increasing revenue per results through smarter people allocation or deployment and productivity enhancements to ensure cost efficiency without compromising quality. Additionally, we are actively exploring avenues to further enhance margins by increasing the order book and expanding our revenue base. These efforts will not only allow us to better leverage resources but also scale operations effectively. Through continued operational improvements, scalability of our flexible workforce model, AI-enabled workflows and sustained revenue growth, these margins in the eLearning business are here to stay. Looking ahead, our focus will continue on customer satisfaction, CSAT, and diversifying our customer base, ensuring resilience and long-term value creation. I would like to now hand it over to Naren to discuss all things related to MPS Labs.

Thanks, Archana. To level set, MPS Labs is a state-of-the-art tech innovation lab having an experienced expert practice group with deep exposure to the research and learning domain and new-age technologies revolutionizing the education industry. With a 250-plus member team, MPS Labs focuses on research and development efforts, studying market requirements, challenges, trends, designing, developing and introducing innovative solutions that introduce efficacy in the end-to-end content life cycle. This strategic approach combines -- leveraging it on, let's say, AI/ML/NLP-driven solutions and cloud-based SaaS solutions, with the development of proprietary tools, workflow automation, intelligent analytics and streamlined editorial processes. MPS Labs has been working on various use cases in AI/ML across workflows and has recently implemented AI/ML-based automation for processes like content structuring, content editing using AJE's Curie platform, accessibility, image processing and chatbots. Our most recent achievement has come in partnership with HighWire, the platforms division of MPS. Together, we have developed and rolled out the next-generation end-to-end publishing workflow solution that consolidates both the preacceptance and the postacceptance into one single workflow, thereby reducing inefficiencies and increasing the speed of delivery. I would now like to hand it over to Tony to discuss the developments in the platform business branded as HighWire.

Thank you, Naren. As a result of the acquisition of AJE, the platform business grew by 88.9% in revenue in Q3 FY '25 compared to the same period last year. Additionally, HighWire's visibility in the market has improved through thought leadership activities, participation in industry groups and organizing workshops and webinars. This has led to an increase in FRIs, RFPs and client renewals. Notably, as Naren mentioned, HighWire has launched DigiCorePro, a next-generation publishing platform based on the principles of single-source publishing. This methodology centers on scholarly content, reducing inefficiencies and accelerating research delivery. DCP's modular architecture and APIs support microservice integrations from MPS Labs and third-party partners. Current clients are transitioning to DCP, and over a dozen prospective clients are testing the platform. We expect to have clients using the full end-to-end submission-to-publication workflow in 2025. I would now like to hand it back over to Rahul to conclude this opening section.

Thank you, Tony, and thank you for the comprehensive update, team. Scaling and busily executing our well-thought-through-and-tested Gestalt growth strategy continues to deliver strong business results. Our 5-pronged approach has powered the recent momentum, which includes a revised go-to-market strategy, a stronger emphasis on cross-selling and upselling in STAR Accounts, the addition of new customers across business segments, the launch of new capabilities such as AI-powered DigiCorePro and an unprecedented pace of integration of AJE into MPS. Now to go over the Board outcomes. I'm pleased to share that based on the robust earnings growth in the first 9 months of FY '25, the Board of Directors has declared an interim dividend of INR 33 per equity share of INR 10 each of the company. On capital allocation, our priority is always to redistribute surplus funds to the shareholders of MPS, provided there is no imminent use of those funds over the next 6 to 12 months. This approach allows us to stay focused, disciplined and responsible. We believe that even after the distribution, MPS will have adequate funds for upcoming acquisitions. Our acquisition approach is now focused on acquiring healthy and growing assets, albeit at compelling valuation and significantly enhancing shareholder value. Let's now open the call to questions.

[Operator Instructions] The first question is from the line of Arun Maroti from Subh Labh Research.

Am I audible?

Yes, you are.

Yes. First of all, sir, congratulations for the stellar performance. Very excellent results. Sir, my question is with regard to the eLearning segment that in eLearning vertical, we have shown Q-on-Q revenue is almost constant. But despite that, we have encountered a very exceptional growth in the margins. I would like to know the rationale behind this exceptional performance. And is it sustainable going ahead?

Sure. I'll take a quick stab at it and request Archana to come in and describe what has really happened here. So firstly, thank you for your kind comments on the results. So the eLearning business has been going -- specifically the India entity, which is the largest part of the eLearning business, has been going through a transformation after the acquisition of Liberate. After we acquired -- after we majority -- majorly acquired Liberate last year, we understood that there is a potential to scale margins in an eLearning business as well through a flexible operating model, and we brought that model to the other entities within eLearning as well. And that's largely been the result of the margin expansion. But I'll let Archana expand on that.

Thank you, Rahul. So as explained earlier, the margin expansion in eLearning was the outcome of a few initiatives we took, like gravitating towards a more flexible delivery model, where we use outsourcing and gig workers more. And we also had strategic rightsizing efforts, and we optimized resource allocation overall. So there was a key focus in terms of reducing the cost per resource overall by increasing revenue per resource through smarter people allocation and deployment into projects. And these enhancements led to cost efficiencies without compromising any quality.

Okay. So I can get that there was a good amount of churning this segment in the eLearning segment in the employee side. Am I correct?

Could you please elaborate on churn?

So as you mentioned that you did the rightsizing and the right allocation. So because as the employee count is more or less same of the last quarter and this quarter also, so whether there was a good amount of churning and good amount of recruitment, or am I going somewhere wrong?

The focus has been in terms of allocating people to projects depending on the cost per resource. And this has led to an optimization because we have reassigned people to projects depending on the yield rates of these projects. So our focus has been on increasing the billable utilization of the resources that we have, increasing the outsourcing efforts and also addressing project overruns, keeping it to a minimum and improving the yield rates with customers. So all of these, put together, have created a compounding effect in terms of enhancing margins.

The next question is from the line of Rahul from Dolat Capital.

Hope [ I'm audible ]. Hello?

Yes, Mr. Rahul. Your line has been unmuted. Please go ahead with your question.

Yes. So my -- first of all, congrats on good performance. And the question was related to the David's comment on how we're seeing the cost optimization deal as a -- one of the trend driving the momentum in the content side. And there was a mention of a 3-year volume lock-in, something like that. I could not get the nature of it. So any comment on that, how the pricing has impacted the volume-committed deals and how, in general, the cost optimization trends can possibly drive the growth momentum? Any color on that would be helpful.

Yes. So I can take that. So any cost -- whenever we do these long-term deals, these are not just brute arrangements. Typically, there's a very clear path of where the efficiency will come from. So we have proposed the utilization of proprietary technology and optimization of workflows as we proposed this in the 3-year arrangement. And yes, the customer does get year-on-year cost improvement, but we also are -- have linked it to spend increase. So our revenue is going up, and our margins are -- will only improve as the revenue goes up. So it is an exchange. It is kind of a value trade where we are improving the throughput of the system. And as we do that, we are passing on some of the efficiencies to the customer, and we're also gaining because they're pushing more through the system. So that's on the specific 3-year deal. On the -- in terms of cost optimization, as David pointed out, that there's been 2 levers here. One is, of course, just reducing the overhead cost in the U.S. in general. The second has been looking at new areas of offshoring where we traditionally have not offshored, and that's led to margin expansion as the revenue has grown.

Got it. Got it. And any flavor, Rahul, you could give on how things are shaping up from the AJE integration side? Is it trending on the revenue side the way we were planning and also on the profitability, if you could share number or at least a directional thought?

Yes. So the focus for AJE has really been around improving margins quarter-on-quarter, which we are -- we have improved. We are now trending in the late 20s in terms of EBITDA margin. Those margins will continue to improve. In terms of growth, really, the revenue has been stable. The part of the business that has started to grow has been more on the B2B side. That's the part of the business that's starting to grow now, now that the business is settling down.

Right. Sorry, I missed the number you said before. How much EBIT margin you said?

In the late 20s.

Late 20s, okay. And revenue run rate is in that INR 225-odd crores, similar to what -- at the time of integration? Or it's downsized or grown from that point?

It's fairly similar. I don't want to reveal too much specifics because this is a new market. We have 1 of the big 3, 1 of the big 4. And I am told we are very actively tracked given that we're a listed entity. So still learning the ropes when it comes to this particular market.

Right. Just last one from my side. Any update on the managed training side of the business, how things are shaping up there? What we see generally in that market is that it's slightly opening up on the consumption or training side. So any progress on those front could be helpful.

The eLearning business continues to grow. Having said that, we have not made -- we have not gotten too many new orders around managed training. It's pretty similar to what we reported last quarter.

The next question is from the line of Gunit Singh from Counter Cyclical PMS.

Sir, you have done a great job in improving the operating margins from Q1, about early 20% to 32% this quarter. So sir, I would like to understand, is there some scope of further improvement in margins? And what are the expected steady state operating margins that we are targeting? And by when can we achieve that? It's my first question. And my second question would be regarding -- so sir, you generally give certain guidance about the future outcomes. So would you like to provide some guidance in terms of what kind of growth we can expect in FY '26 and how much of that would be from -- would be organic and what kind of inorganic opportunities we are targeting? These would be 2 of my questions.

Yes. On the margin front, we are pretty happy with where we are right now. We could see additional appreciation because historically, our lens on eLearning has been 25% type of margin. And as you can see, we've crossed that 30% hurdle that we've been trying to cross now for 2 or 3 years for the first time. So our goal really is now -- and I'm specifically focusing on eLearning because that traditionally has been kind of the lower-margin business. Now that, that business has crossed 30%, I think our first goal is to make sure we keep repeating this level of margin profitability. And of course, as revenue grows, given the operating leverage in the business, margins will continue to grow. So at this point, we will really look at revenue growth to drive margin expansion, and that's really the thinking. Have we maximized the operating leverage? Absolutely no, that's still -- as revenue grows, margins do expand. So that will continue to happen. In terms of guidance, we took a call last quarter that we have a very good North Star in Vision 2027, which is INR 1,500 crores in revenue at similar margins by FY '28. We feel comfortable as a management team that, that North Star is something that we like to move toward. And we no longer wish to provide any quarterly or short-term guidance because we feel it's more a distraction from that North Star. I have shared that in this -- in the last quarter as well. So we will, going forward, abstain from any short-term guidance because we feel it is a distraction and does not add any value to the business. In terms of acquisitions, we are essentially looking more at education plays, given the last -- given that the last few plays have been across corporate and research. So we are specifically looking at more education plays given that our last acquisition in the education world go back in 2015. So education is really the focus. Within education, we're looking at some adjacent markets where there are plays where we are getting closer to the end consumer as well as looking at platform plays. So we are not looking to do more of the same in education. We're looking to diversify both in terms of capabilities as well as geographies.

The next question is from the line of [ Mahesh ], an individual investor.

Rahul, can you hear me?

Yes, I can.

Rahul, a few questions on eLearning. What is the update on the 15 new logos that you won in Q2 FY '25?

Sure. Thank you. So the 15 logos we had won was in the first half, not Q2, but that was a good observation. I'll let Archana, who runs that business, talk a little bit about how those 15 logos are progressing.

Thank you, Rahul. So we have completed some of the projects and are in the process of delivering other pilot projects with the new logos. And I'm happy to report that the feedback so far has been encouraging, and we are optimistic about our long-term potential with these new accounts.

Okay. The second question on eLearning, Rahul. What are your thoughts on acquiring firms with AI capabilities in eLearning specifically?

So the way we look at AI specifically is more around operational efficiency or -- so far, that's really been the focus. We do have some AI-based revenue streams now as well. So there aren't too many scaled plays that we have been able to evaluate of what you described. These -- what we've seen so far are opportunities that are sub-$5 million in revenue. And as a result, we have not so far looked at those type of opportunities because they are subscale opportunities. Having said that, if something does come our way that's more scale, we will obviously look at those kind of opportunities as well.

Just one follow-up question now that you mentioned using AI as a revenue stream. Can you describe the kind of progress we have made on that?

Yes, sure. So we -- and as I pointed out in a previous discussion, we historically were doing more small consulting project, less than $50,000 per project. We are doing POCs for virtual reality. In the last couple of quarters, specifically in the education business, we've been able to win some large contracts within translation, AI-powered translation. We won contracts over $3 million. Similarly, on the accessibility side, we've won contracts over $1.5 million that are AI-enabled projects. Additionally, we've done some software development upwards of $250,000 as well. So the AI work stream is now becoming -- revenue stream, rather, is becoming a reality for MPS. So I would say, overall, it's still sub-$5 million but getting closer to $5 million now.

The next question is from the line of [ Karan Kapuria ], an individual investor.

Am I audible?

Yes, sir.

I have 2 questions. I want to check first thing about the next acquisition planning. So do you think there will be a requirement of any debt or our internal activities -- internal cash will be enough?

Thank you for your question. As I was sharing, the next set of acquisition plays are mostly going to be in the education space. We can't really provide any forward guidance on what those are. What I can share is if we do have to take on debt, we're comfortable taking on INR 150 crores. But at this point in time, we don't have such a requirement.

Understood. I want to check one more question. So in the last con call, so Tony mentioned about there is a risk for security of copyrights and data privacy of the -- our customers, right, while we embrace artificial intelligence and ML. So how do we see that kind of risk coming? And can you elaborate on that to get more insights into that?

Narendra, do you want to take that? Is there some risk linked to data privacy and customer data with AI?

Yes, sure, Rahul. Yes. So in terms of -- definitely, yes, there are client concerns on this area as well. So we take a lot of precautions on this, and we do have -- we are ISMS-certified. And in terms of data privacy, we ensure that all adequate safeguards and protocols are followed while we implement and develop the AI-based solutions within our platforms and workflows. So for example, we try to ensure that we don't use any customers' content in the AI models without their permissions. So -- and all of our AI-based models are privately hosted and only exposed to us. So we don't expose anything outside -- on the Internet.

Does that answer your question, [ Mr. Karan ]?

Yes, yes.

The next question is from the line of Pratik Kulkarni from KamayaKya Wealth Management.

Good set of [ numbers ]. Congratulations on that.

I'm sorry to interrupt, Mr. Pratik. Your voice is coming very low. Can you please use your handset?

Just a second. Is the volume okay now?

Yes, sir. Please go ahead.

Yes. So I just wanted to know that last year, we were saying that the market is quite fragmented. And currently, there is consolidation phase going on where MPS is also playing a role of the consolidator. So I just wanted to know the outlook on the market and then how is it currently.

Yes. So all the markets that -- we operate in 3 core markets: research, education and corporate. All 3 markets are quite fragmented. There is consolidation, as you rightly pointed out, going across all key markets in different ways. Within research, we have customers entering the supply chain side. We have competitors buying each other out. On the education side, there are multiple private equity exits happening. On the corporate side as well, there are exits happening. So the market keeps consolidating and is growing. So overall, education is growing at 13%, 14%. Corporate is growing at 11%, 12%. Research is growing at about 8%. So yes, it's pretty much same commentary from last time in terms of the market and how it's progressing.

Yes. Okay. And one more question is that if the market is -- like you said, is quite fragmented, so how are we able to maintain such good margins? And do we have some pricing power regarding to that?

So a couple of things. I think, one, our value proposition in terms of corporate strategy is really around operational excellence. We drive operational excellence through smarter workflows. We tend to throw technology at the problem rather than throwing people at the problem. So we're constantly looking -- MPS Labs and Naren's team are constantly looking to automate tasks and also reduce the number of touch points in any workflow. Thirdly, we tend to -- our teams tend to be present more in Tier 2 and Tier 3 cities, which also -- and that's not just in India. That's across the globe. That also allows us an additional competitive advantage. So typically, we tend to do things in a more process and technology-driven way in a world where most people are throwing people at the problem. And that's really -- what's different about MPS is our level of operational excellence. If you look at the organization, when -- while the employee costs have gone up over the last 13, 14 years, when ADI acquired MPS back in 2012, we had 3,500 employees, and our revenue was about INR 120 crores. Today, our revenue is 6, 7x of that, and we have less employees, 3,000 employees. So that just shows a level of efficiency that we are unlocking through the various methods I described.