NIIT Learning Systems Limited (NIITMTS.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to NIIT Learning Systems Limited Q2 FY '26 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Vijay Thadani, Vice Chairman and Managing Director. Thank you, and over to you, sir.

Thank you. Good afternoon, all of you, everyone who's joining the call. Thank you for your interest in NIIT Learning Systems Limited and for joining the call today. The agenda today is to provide an update on the results of quarter 2 FY '26, which were announced yesterday, but because of being a public holiday, could not be shared -- we could not do this call yesterday. I also -- we also want to provide you an update on the inorganic activity, which was completed during the quarter. That, of course, was shared earlier, but this will be a reiteration of that. As a starter, I just want to mention that this is a significant -- this quarter's results is a significant validation of our AI-first strategy with the recognition by Fosway, the leading research firm, of our pole position in AI for learning and our AI-enabled revenues are now contributing almost 10% of our business this quarter. So we would like to share that with you as well as the outlook for this business. As usual, I have the whole team with me as we attend this call. Mr. Sapnesh Lalla, our CEO, will lead the call. Sanjay Mal, our CFO; Kapil Saurabh, our M&A and Investor Relations; Mr. Jaswinder Chadha, who looks after finance of NIIT Learning Systems, global operations and many of other colleagues are joining this call and we will be participating in answering your questions. So with this, I now hand you over to Sapnesh, who will take us through the initial brief, and then we'll open up for question and answers.

Thank you, Vijay, and good afternoon to all of you, and thanks for joining this call. In our prepared comments, I will review the performance and also share expectations on the path ahead. First, let me set the context. global economy, economic environment continues to remain volatile and uncertain, driving longer decision cycles and stakeholder changes across sectors. We are starting to see marginal pickup in consumption, although our clients continue to remain focused on cost discipline and continued scrutiny of discretionary spending. That said, the situation remains dynamic, and we continue to adapt to the volatility in the environment. AI is continuing its rapid march to becoming mainstream with significant investments by early movers, including several of our clients across different segments. Despite this challenging backdrop, the business delivered a strong operating performance. Our revenue grew 20% year-on-year and 5% quarter-on-quarter. In constant currency terms, the revenue was up 15% year-on-year and 3% quarter-on-quarter. As shared earlier as well as by Vijay, we completed the acquisition of MST Group in Germany in July. Excluding contributions from the MST Group, the revenue was up 17% on a year-on-year basis and 3% quarter-on-quarter. Please note that our fiscal quarter 2 is a vacation quarter in a lot of Europe, more specifically in Germany. Overall, the revenue came in at the upper end of our guidance. This performance was driven by ongoing customer additions and ramp-ups, once again underscoring the strength of our go-to-market engine and the value that we bring to our clients as well as the trust and faith our clients have in our delivery and execution for their critical needs. We continue to see strong customer traction, securing three new MTS logos. Further, we renewed three existing contracts and expanded the scope of one large client, maintaining our 100% renewal record. As we have guided earlier, the addition of MST added seven marquee clients in Germany, taking our MTS client tally for the first time past the 100 mark to 104. Our ability to expand share of wallet with existing clients remains a key growth driver, supported by deepening relationships and demonstrated delivery excellence. While spending from existing clients saw marginal improvement, the recovery remains gradual and overall spending remains meaningfully below the slowdown levels. We remain cautiously optimistic on the recovery as we continue to create new value for our clients. Notably, the business continues to outperform peers, demonstrating resilience to industry-leading growth and profitability. Please note that as guided earlier, we successfully completed the North American real estate contract on June 30. We have also finished the teach-out and transition this quarter. As shared earlier, we have made significant progress in building our AI capability. We now have a pole position as acknowledged by our clients as well as industry analysts, as Vijay pointed out earlier. NIIT has always been at the cutting edge of technology and learning. Our AI-first strategy in learning has evolved into a considerable point of differentiation for us. We have gone live with a number of enterprise deployments of our AI solutions. Notably, total AI-enabled revenue grew to about 10% of the business this quarter. We expect this percentage to grow rapidly as we look ahead into the next several quarters. Coming to our financial results. In Q2, Revenue for the quarter was INR 4,757 million, which was up 20% year-on-year and 5% Q-o-Q. In constant currency terms, revenue was up 15% and 3% quarter-on-quarter. EBITDA for the quarter was INR 966 million, was up 2% quarter-on-quarter, with EBITDA margin of 20.3% as guided by us in the past. Business highlights. Let me touch on some of the business highlights. We -- like I pointed out earlier, we added three new MTS contracts, three renewals, one expansion. And as mentioned earlier, added seven new MTS clients by way of MST Group becoming part of NIIT. The revenue visibility now stands at $409 million versus $388 million at the end of last quarter and $368 million at the end of same quarter last year. Back to a little more color on the financials. Depreciation and amortization was at INR 184 million versus INR 181 million last quarter. This includes a notional amortization charge of INR 32 million related to St. Charles consolidation and a new charge of INR 21 million due to the MST Group acquisition. Net other income was negative INR 89 million as compared to negative INR 40 million last quarter and negative INR 38 million last year, same quarter. I'll invite now Sanjay to walk us through and provide more color on other income.

Thanks, Sapnesh. So net other expense in a way was contributed by lower treasury income at INR 74 million this quarter as against INR 125 million in the previous quarter and INR 117 million in the same quarter last year. We had strategic growth and acquisition expenses, which were about INR 120 million in this quarter as compared to INR 112 million previous quarter. The demerger scheme-related expenses are at INR 2 million, which were INR 5 million in the previous quarter. Other income, which is negative INR 41 million includes the -- and the treasury income includes the impact of MTM on fixed income investments due to interest rate volatility. During the quarter, the tax came at INR 223 million. The tax was higher, marginally higher due to transaction and notional consolidation charges that are not tax deductible and the withholding tax on dividend from a foreign subsidiary during the quarter, which we declared for the shareholders in this quarter.

Thanks, Sanjay. Given some of the nonoperating transaction-related transitory expenses as well as mark-to-market charges that Sanjay explained. Our PAT was at INR 470 million and the EPS was at INR 3.43. Our balance sheet and cash flows continue to remain strong. DSO stood at 66 days. Cash and cash equivalents were at INR 8,079 million. The CapEx for the quarter was INR 99 million as we continue to invest in Gen AI. Operating cash flow was INR 777 million with free cash flow at INR 677 million. The net cash position was at INR 5,917 million. I wanted to spend a minute on our guidance before I get into providing a view on our strategy and overall market update. We continue to see a robust contract pipeline, and we are continuing to execute and convert that pipeline into contracts, as you noticed for the previous quarter. We are also in the process of ramping up new customers. For Q3, our constant currency growth is expected to be between 2% to 3% quarter-on-quarter. For the full year, we expect constant currency growth to be around 12.5% to 13% year-on-year, and our margins are expected to be in the 20% to 21% range for the full year as well as for Q3. So for the full year, we have retained our guidance as we provided previous quarter. Overall, like I've said earlier, market volatility continues to heighten. The emphasis on cost optimization, prompting increased client engagement on large-scale cost takeout and transformation initiatives, although I would point out that decision cycles for these initiatives tend to be long. AI and its profound impact on practice of learning and development is real and is starting to become visible, as you noticed from our numbers. Early adopters are starting to take advantage of AI with our assistance. We think that this has a potential to become a multiyear growth opportunity for your NIIT. We believe NLSL is well positioned to capture a disproportionate share of these opportunities underpinned by continued investments in AI, consulting and advisory services as well as sales and marketing, a strong brand as a trusted and reliable market leader. Our deal pipeline, as mentioned earlier, continues to be robust with active opportunities across large deals across technology, automotive, life sciences and BFSI sectors. However, we would like to point out that due to the significant market uncertainty, the decision-making cycles are starting to stretch beyond what we would consider top. We continue to make disproportionate investments in new capabilities and go-to-market strength. You saw that demonstrated by our investment in acquiring MST to penetrate the DACH region as well as the German market in a most significant way. We will continue to make such investments to improve the capability and the value that we are able to bring to our clients. Generative AI is becoming increasingly central in our client discussions, though broader adoption at enterprise scale for L&D remains cautious. Nonetheless, we are rapidly expanding our use of AI across multiple work streams. Where deployed, we are becoming more ambitious in delivering measurable learning outcomes for our clients while also realizing notable efficiency gains. A minute on reminding everyone on MST becoming part of NIIT. We announced on July 9, we completed the acquisition of MST Group based out of Munich in Germany through NIIT Ireland. The transaction aligns with our strategy to invest in new capabilities, geographies and verticals. MST strengthened our presence in the DACH region and brings more heft to the industrial vertical that we serve. This combination unites MST's local agility and sector depth in industrials with NIIT MTS' global scale and AI-enabled solutions, positioning us as a partner of choice for enterprise learning transformation. With that, I'll hand the conversation back to Vijay, and we could open it up for questions.

I think we can open it up for Q&A now.

[Operator Instructions] The first question is from Rahul Jain from Dolat Capital.

So, yes, I have a few questions. Firstly, how are we planning to account the MST revenue? If I remember the number that we shared at that time in the filing was EUR 17 million, and there was an adjusted to expense revenue of EUR 10.6 million. So what is the run rate that we would account for? And what is the number of days contribution from MST in this particular quarter?

So we -- from an accounting perspective, we would continue to book the net revenue, and consolidate net revenue into our accounts. Like I pointed out, this was a truncated quarter and a quarter with a lot of vacation in most of Germany. So their revenue that came in, which contributed to about 2.5% in terms of growth was not what you would consider run rate revenue. Their run rate revenue would start from this coming quarter.

Sure, sure. And one large account, which we were expecting to come to West. So is that finally accounted for in this quarter? Or there is further more left, which could go down in Q3?

No. Like I pointed out, we have completed the transition and teach out of the North American real estate contract. I'm guessing that's what you're referring to.

Yes, yes. Okay. And to your commentary on expecting 12.5% to 13% growth is what I could hear from your prepared remarks. So just to understand that is this more to what we have already in our run rate in terms of addition has been pretty strong. And is there an element of conservatism or input given that we have seen tend to some time for some reason or the other or there could be risk to that level given the kind of macro we are in?

So you were breaking up, but what I took away from your question was whether the projection or the guidance that we provided is conservative or there may be an element of risk. I would say what we provided is what we can see. It is inclusive of organic growth that we guided for 10% plus as well as the 2.5% to 3% that MST is likely to add to our overall growth for the year. That said, there is a risk in the market, and we are not immune to that risk, but we feel that we have the potential to meet the guidance.

Understood. And just last bit from my side. You have shared this additional input that AI-enabled revenue grew about 10% in Q2. So any color if you could share in terms of what -- I mean, what is the precise nature of it? Is it -- when we include this, are we also counting where it has used from a delivery perspective or the final outcome of the output that we have given is AI-powered. So how we are defining this and what all opportunity we see here?

So this is the first time we are providing this metric. And over time, we will provide more color. But at the outset, what I would want to say is the AI-enabled revenue is inclusive of use of our AI studio for creating works or work products that our customers are likely to consume. Those work products, it's possible, may have AI attached to those products, and therefore, would have live AI interactions as they are consuming those products as well as those products could have been built using our AI studio. So it's a combination of both. And as we start to measure and provide more qualitatively this revenue, we will start to provide a little more color. But what we are really enthused about is the fact that about 10% of our business is now AI-enabled, and we are starting to see significant growth opportunity in that percentage increase.

Yes. Thanks for the color, Sapnesh. Just to -- if I could, like you said on this. So the both aspect of it, one is you said using your AI studio. So that in your opinion, enhancing that is more about productivity side of it? If yes, then what is the value that we are driving there? And secondly, when it is more AI live consumption, even at the product level, I think the experience of getting enhanced significantly. Do you think by doing that, you are opening up a larger opportunity and also competitive edge? Any color on that would be great.

Sure. So personally, and I've mentioned this in the past, we don't think efficiency will add a huge amount of value to our clients. I think what will add a lot of value in terms of use of AI is the effectiveness of training that we build for our clients, and that's the majority of what we do. Your second point about are we embedding or attaching AI interactions, which the clients could continue to use as they are consuming the content. Yes, part of that 10% is that, and we expect that, that 10% will -- or that part will grow faster and create a significant line of business for us.

That will be continuing revenue.

And that would be continuing revenue. So while a large part of our revenue is delivered on a work-for-hire basis, but there is an element of subscription revenue that AI brings, which could be continuing and which could create a significant growth opportunity. Again, -- we are starting to track this metric. We've been tracking it for a couple of quarters now, and we thought that it will be useful to share it with our analysts and stakeholders. But over time, we will provide more color.

Right, right. And just a small feedback. It would be great if we also keep disclosing whenever we would do with whatever frequency, the breakup of both sides. One is on the production side versus on the consumption side for the customer? Because I think the latter is what is more powerful differentiation. Of course, both are equally relevant.

Yes, I would say, at least for our clients, both are very valuable.

Next question is from Deepan Sankara Narayanan from TrustLine Holdings.

So firstly, congratulations for strong double-digit growth in revenues year-on-year. So we could see that excluding management consulting and other segments, the revenue growth was strong by 30%. But what is the key reason for this 22% Q-on-Q decline in consulting and professional services? And when do we expect recovery in growth of this segment?

Thanks. Thanks for pointing that out. There is some amount of seasonality across the management consulting and professional services clients. Unlike the large majority of our clients who work off of a calendar year fiscal, some of our clients in management consulting and professional services have midyear year-end, and that tends to distort the picture where their consumption increases towards the end of their fiscal years. But that's really the reason for quarter-on-quarter. I think a better metric to review performance in management consulting and professional services segment is to look at the year-on-year. And I think we are starting to bottom out and starting to look at growth coming back to that segment.

Okay. Okay. And considering now the top line growth is visible and do we expect higher operating leverage playing out in coming quarters with the margins improvement? And this line item of expenses like professional and technical outsourcing, that has gone up substantially high, right? So will it stabilize at these levels or it will fall from here?

So I think you asked two or three questions. Let me see if I can respond to most. I think your first question was, do we expect to gain operating leverage. And I would say what I've said in the past that we continue to see very significant opportunity. The market is underpenetrated. So we'll continue to overinvest in capability building as well as sales and marketing and rather than pulling out operating leverage. I think -- what was the second point?

In professional and technical services.

You mentioned that there is an increase in variable cost or professional services expenses. Mostly, that's a measure that we use when the market environment is volatile. We -- and again, this is something that I mentioned in the past. We do not want to be a firm who increases headcount, not knowing with certainty the utilization. So our expectation is that only when certainty comes back, we will be add headcount and increase our fixed costs till then we continue to rely on our partner network and rely on variable cost to deliver the business that we are gaining.

Okay. Okay. And so considering our strong positioning as #2 among specialized learning outsourcing firms worldwide and huge opportunity in terms of outsourcing penetration increasing. So what are the challenges even currently we are facing in scaling this revenue growth to higher growth rates over medium to long term.

Yes. I think we are starting to grow faster. You may have noticed. And that acceleration is testament to the value proposition that we bring to our clients. The market environment is very uncertain. However, there are parts of this uncertainty that work in our favor. If you go back into time, you'll notice that whenever there has been high uncertainty or high inflation or high volatility, there has been a remarkable increase in outsourcing. And we expect to experience the same over the next several quarters. I think also there is a flip side to that where at times of uncertainty, decision-making slows down. But I think we think that we have a positive here. A large number of enterprise clients are focused on improving their cost basis and figuring out how in such a volatile and fast-changing environment, they can provide better learning outcomes to their employees and extended enterprise employees, and they see NIIT as a viable choice. So, I think, overall, we have a strong growth opportunity. It will take time given the environment, but we think that from a long-term perspective, we have a strong growth opportunity. We have whole position, as pointed out by our clients who have renewed their contracts year-on-year with us as well as what Fosway Group pointed out, like Vijay mentioned, where our investments in building capability are becoming visible not just to our clients, but to analysts as well.

Next question is from Sankaranarayanan from ithoughtpms.

My first question is regarding the AI-enabled revenue. So is it related to one of our major services content creation? Or are we providing broad-based use cases from this AI-enabled service?

I really can't hear what you are saying. You're coming in very faint. Can you say your question one more time, please?

Am I audible now?

Yes. Yes, much better.

Yes. So I was asking whether this AI-enabled revenue, is this business contributing more from a content creation service perspective?

I would say it's a combination of content creation, embedded AI interactions in the learning materials that we provide as well as assistance to learning delivery by way of expert coaching that helps our instructor teams deliver better outcomes in classes. So it's more broad-based than just content creation.

Got it. And from a margin perspective, is it same compared to the overall business? Or how is it...

Like I pointed out, we have started tracking this recently, and we'll provide color and more qualitative information over a period of time.

Got it. And one more question. Let's say, if one of our clients is doing massive layoffs and how will that unutilized budget of outsourced L&D spend will be moving going forward? Will they take back those budget to themselves? Or do we get those incremental wallet share from them?

Yes, I think nobody wants to give up their budgets. That's a basic rule in most enterprises. But that having been said, I think the layoffs are happening because there is an imbalance of skills in an enterprise. It's not an imbalance of people. It's an imbalance of skills where given the rapid change of relevant skills, that are needed by an enterprise to grow, they find parts of their employee base do not have those skills, and it will be hard for them to train those employees on the new skills that are needed. And therefore, they decide to lay off those employees. However, on the flip side of it, given the rate of change of skills that are needed for growth, the consumption of training is likely to go up. Like I pointed out, we've seen some improvement with respect to consumption of training over the last quarter, last couple of quarters. And we think that as the rate of change of skills needed to grow changes rapidly, we think that this will improve the opportunity we have.

Understood. Last two questions, like one is our professional and technical outsourcing expense. Is it mostly towards getting the new trainers or working professionals to be deployed in a project? This is my first question. And then unlike IT companies who are winning deals for the last two, three quarters, broadly, from an L&D outsourcing perspective, the last two, three quarters have been muted in terms of winning deals. Like why do you think there's a difference between like outsourcing IT or prioritizing IT first and then prioritizing L&D first? And what's your thought on this on outsourcing?

Sure. To answer your first question, I think I mentioned it earlier, given the volatile environment, we do not want to add to our fixed cost and are relying on variable costs to deliver against growth that we have seen. As we see the volatility subside, we'll start thinking of adding to our fixed cost. But at this point in time, we want to contain our fixed costs and deliver the growth through variable on using variable costs, be it trainers, be it other professionals and so on and so forth. I think your second -- what was the second question? Just say it again.

So I was just comparing the deal wins winning by the top IT companies broad industry, yes, and how is it different from outsourcing their L&D.

Yes. I think if there was a pecking order, IT followed by BPO followed by training in terms of priority with respect to outsourcing. And part of it is just the amount of spend. The second part of it is a lot of times, IT is more deeply and directly connected with business as compared to L&D, which is one step to move.

Got it. And do you see any impairment that you will do in acquisition considering its muted revenue growth?

At this point in time, we have retained the opportunity to grow that business given for professional services firms, people are their product. And given the rate of change of skills, it's likely that, that expense will -- that business will grow. We also are starting to see early signs of growth in that business, but we will take these decisions at an annual cycle towards the end of the year.

Next question is from Ganesh Shetty, who is an individual investor.

Congratulations for good revenue growth during the quarter. Sir, I want to just have some more information on MST that MST Group we have acquired and they have some nearshore capabilities. Will it enhance our operational efficiency in delivering to the European countries? And from that perspective, there can be some operational efficiency and operational margin improvement. Can you please throw some light on this, sir.

Absolutely. That was one of the reasons for looking at MST as a viable opportunity. The nearshore capability in Eastern Europe would be very helpful for helping our clients, especially as costs become critically important for our clients in Europe. How soon we will realize cost savings is to be determined. But over a period of time, it would be very beneficial.

Sir, my second question is regarding our sector exposure. And in the recent past, we have emphasized our intention to enter into other sectors like new energy or automobile, which is also catered by MST. So is there any progress in that matter? And the capability building from our end, how it is all we are moving ahead, sir?

Thanks. I think that's a great question. As you have seen, we have expanded in the energy sector, in the aerospace and aviation sector as well as in the mining sector. This -- from this quarter onwards, we've consolidated these into an industrial segment that we are starting to report. In the Industrial segment, given MST joining NIIT, we've also included the automotive segment. I think each one of these segments as part of industrials creates a growth opportunity for us. It's a very significant segment of the market. And with the capability and the geographical closeness that we have with the acquisition of MST as well as the skills that we have developed over a period of time or the capability that we have developed over a period of time addressing energy, mining and aerospace keeps us in good stead to grow in the industrial segment.

[indiscernible] now at about 21%. Overall, industrials are now at about 21% of our total business.

Yes. Sir, my third question is regarding our sectors which we are catering mainly, that is life sciences and technology. Technology and telecom is facing a lot of crisis. And is there any decrease in discretionary spending or there is another part of it that the skilling may be required in a very enhanced position. So these are the things which are whether it is -- that is one thing. And second thing regarding life sciences, we had a great in life sciences after acquiring Eagle Solutions. So is there any good improvement in the client finding. Can you please explain this? All that is for the future.

Thanks. I think both are great questions. In technology and telecom, we are continuing to see growth, mostly because of adding and ramping up new clients as well as, as you can imagine, technology is one area that's changing rapidly, and it's causing change globally. So we expect that we will continue to see growth in the technology and telecom segment. You are right in pointing out that we've had a good run with life sciences. Almost 8 or 9 of the top 15 pharma companies are our clients. And as we add to our capabilities, both geographic as well as in the work that we have to offer, we should see continued growth in the life sciences segment.

Next question is from Bharat Gulati from Dalal & Broacha.

Sir, I just want to understand that I just wanted a clarification on the guidance that you've given of 12% to 13%, is that organic growth guidance or overall guidance?

Overall.

Okay. So are we then guiding for organic?

Yes. Our guidance -- we are retaining our guidance of 10% plus for organic.