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

Ladies and gentlemen, good day, and welcome to NIIT Learning Systems Limited Q2 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vijay Thadani, Vice Chairman and Managing Director, NIIT Learning Systems. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone. Thank you very much for joining us on this call. As always, it's a busy Diwali season. So your time with us is very precious for us, and we would like to take the maximum advantage of that. Also wanted to just revisit the fact that for NIIT Learning Systems Limited, which is the demerged entity out of NIIT Limited and which got listed on 8th of August, this is the first quarter as a listed entity. And therefore, we are sharing the results of the quarter ending September, which happens to be the second quarter of the fiscal year. The agenda is to give you a quick update on the demerger and listing process, which just finished actually, the process got completed, the entity is listed. And today, the Board met to declare the quarter 2 results. While I will request Sapnesh to share with you results and many of you have access to those already, I just wanted to reiterate the fact that the Board also declared an interim dividend of INR 2.5, which is 2 rupees and 50 paisa per share of face value of INR 2 each. So Sapnesh will take us through the results and the analysis of the results as well as outlook for the coming times, and then we can get into Q&A. Thank you.

Thanks, Vijay, and thanks, everyone, for joining this call. We appreciate your interest in NIIT Learning Systems Limited. I will focus on the operating performance of the company for the second quarter financial year '24. The revenue for the quarter was INR 3,819 million, which was up 27% year-on-year, flat quarter-on-quarter. We note that the financials include the impact of the acquisition of St. Charles Consulting Group, which the company acquired in November of '22. The composite scheme of arrangement for the demerger of the business from NIIT Limited and Forex volatility. Excluding St. Charles, the revenue was up 7% year-on-year and up 2% quarter-on-quarter. In constant currency terms, the revenue was up 21% year-on-year, but down 2% quarter-on-quarter. EBITDA was at INR 910 million, which was up 58% year-on-year, but down 2% quarter-on-quarter. EBITDA margin was 24%. The margin was up 264 basis points versus the second quarter of last year and down 34 basis points quarter-on-quarter. Depreciation was INR 170 million, which includes the impact of the full quarter of rental expenses that NIIT Learning Systems Limited has taken on post the demerger. The other net other expenses were at INR 66 million. This includes treasury income of INR 64 million; Net Forex gain of INR 14 million; exceptional expenses of INR 43 million, predominantly related to the demerger, including INR 38 million towards stamp duty; and net finance cost of INR 95 million. The corporate after tax for Q2 was INR 469 million, which was up 27% year-on-year. The EPS was INR 3.50 per share as compared to INR 2.80 same quarter last year. Despite the EBITDA being similar to Q1 of the current fiscal year, the PAT is lower quarter-on-quarter due to higher taxes and scheme-related expenditures. As stated earlier, while the prevailing uncertainty in the environment continues to impact near-term volume of consumption of services by our existing customers, our long-term prospects continue to improve. The company continues to accelerate new customer acquisitions, increase its wallet share and maintain a track record of 100% renewal of contracts. During Q2, the company added 4 new managed training services customers. This is the third successive quarter with an addition of 4 customers. These included 1 large industrial and chemical company, 1 top 4 professional services firm, a global asset management company or international development organization. In addition to the 4 new contracts, there were 4 renewals, out of which 2 were expansions. For the new contracting activity as well as the renewal activity continues to be as per our expectations, it was to continue to accelerate. The number of active managed training services customers now stands at 85. And with these additions and expansions, the visibility for the business as on September 30, '23 was at $350 million. The balance sheet continues to be strong, although there is a temporary increase in working capital required to transition some of the contracts, which were held at NIIT Limited to NIIT Learning Systems Limited post completion of demerger. We expect the temporary phase to get over soon. The DSO was at 46 days as compared to 42 last quarter and 41 Q-o-Q, subsequent to the temporary increase in working capital. The cash balance is at INR 5,858 million, the net cash is at INR 4,809 million. This includes the impact of temporary increase in working capital as well as the closing of EUR 3 billion investment in EIT InnoEnergy, which was consummated in this past quarter. The headcount increased by 78 quarter-on-quarter to 2,468. The ramp-up was to take care of the transition for customers added in the previous quarters. NIIT Learning Systems Limited continues to make disproportionate investment in marketing and new capabilities as we have discussed in the past. During the quarter, as I pointed out just a minute ago, we made a strategic investment in EIT InnoEnergy to overlap the green energy sector for activity where we can gain managed training services customers as large organizations or start-ups start to make their mark in the decarbonization journey. We're also investing and making rapid progress in leveraging AI across multiple aspects of our work. Like I have pointed out in the past, AI is going to materially impact work that's not just we do the work that our customers do as well and investments in the area of AI will hold us in good stead as we bring value to our customers. The sales pipeline continues to be strong, and the environment is aiding given the higher propensity to outsource given the uncertainty. We're also actively seeking to invest in inorganic growth, and we will let you know about activity in this area as something material shows up. As stated earlier, when we announced our annual results for FY '23, we had expected the first half of FY '24 to be flat. Our results are approximately in line with that guidance. As guided, we've seen an acceleration in deal velocity and that's visible in the new customized additions that I talked about. And our pipeline continues to be robust. As a result, the deal wins have accelerated, and we continue to see 100% customer retention. While the rebound consumption is taking longer than we had expected, we expect that the new customer acquisitions will help bring growth momentum back as consumption starts to stabilize and pick up. While the medium- to long-term fundamentals of the business are improving, sequential growth is challenged in the near term as the positives are being offset to a great extent by the compression in spending by existing customers due to the prevailing economic uncertainty. Although recovery is delayed, we expect to see some sequential growth in H2, driven predominantly by new customer additions. Based on this, we now expect a growth rate from a year-on-year perspective for FY '24 to be in the early to mid-teens. We expect the margins to be in the 22% to 24% range for the full year. We think that over time, as the spending levels come back to what is normal and considered healthy and given the transformations that most of our customers and entire industry segments are going through, we expect that most industries will invest in training to ensure that they are able to achieve talent and skills that they need to complete the transformations that they have embarked upon. And I think that is what will ensure that we continue to grow at 20-plus percent from a year-on-year perspective in the long term. With that, I wanted to close out my prepared comments and hand you back to Vijay and the moderator for our Q&A.

[Operator Instructions] The first question is from the line of from [indiscernible] Goodwill Warehousing.

My first question was about the one-off, the 30% tax and the exceptional items. So could we assume that the exceptional items are done for now are the merger-related expenses? And secondly, what's the reason for the higher tax?

The reason for higher tax, there are a couple of reasons. The first one is that in Q1, we have got a benefit -- a onetime tax benefit, which we did not accrue in quarter 2. And second, we had a higher incidence of tax because of movement of, or a dividend from one subsidiary to another to take care of our capital investment. So from an overall perspective, as we look ahead, we think that our tax rate will be in the area of 27% going forward.

And the M&A expenses, like the demerger expenses?

So demerger expenses are onetime expenses, for example, stamp duty. And by the way, tax rate also gets affected by that because it gets expensed out, but it does not gives you a tax benefit. So therefore also, the tax rate appears higher.

But going ahead now, exceptional items would be largely done, the demerger related?

Yes. Those are done. But let Sanjeev, our CFO, let him explain to you. Some of them are of continuing nature, you will see those. So Sanjeev, just …

So the exceptional expenses, as we mentioned, this time were more related to the stamp duty, which maybe any other incidence of that. But other legal experts and other things will be not there anymore. There is an adjustment of financial charges basically -- sorry, the certain expenses relating to NIIT options, which are there, those will continue, but it will keep going down each quarter. This is pre-demerger whatever NIIT options were there are under the other sales expenses, those will not be issued anymore.

So continuing question, actually, I had was on the ESOP policy, around how much equity are we diluting every year with ESOP on a longer-term basis? Hello?

Sorry, we are not able to understand what you're saying. Maybe one of our...

[indiscernible] ESOP policy to value the fixed proportion of equity in terms of ESOP every year and is there a guidance related to that.

Yes.

No. So the company does have an ESOP policy. At this point of time, NIIT Learning Systems because it has just got listed, ESOP policy is not yet approved by its AGM. And therefore, I can't say that we have an approved policy, but NIIT Limited an ESOP policy and many people who have moved from NIIT into NLSL have got that ESOP grandfathered into their employment, which means that if they had unvested options, then those options will vest as per the schedule and they will get 1 share of NIIT and 1 share of NLSL. NLSL will have to bear the expenses of all the shares which have been given to NIIT options given to NIIT. And NIIT will have to bear all the options of NLSL people as and when they get exercised. So I think that's the way the expenses get worked out. If you like, we can talk to you and explain to you on a chart how it works up.

No, no, okay. That's good enough. Just my last question was we have a substantial business in Canada. Despite the geopolitical thing, how is it going over there? And are we facing any issues with visas or anything?

We haven't faced any issues.

[Operator Instructions] Next question is from the line of Shradha from Asian Market Securities.

A couple of questions. The first is, generally, in every third quarter, we see some budget flush happening. So do we expect this kind of a flush this time as well?

Are you going to ask your next question? Or you want me to respond to this one first.

First answer, then she will think of the next.

The flush is indicative of budgets that organizations want to use so that they don't use them. At a time when budgets are compressed, while some customers, there might be, but it's not something to write on.

In your new guidance, even if you assume a 12% growth, the ask rate is close to 3% for the next 2 quarters. So how comfortable are we at the new guidance? Or do we see a chance of further cut in guidance if that 3% growth doesn't come by in the next 2 quarters? I mean, is there any chance of a further cut because the macro situation still remains very volatile?

None of what I'm going to say, I want to mention that the macro situation is not volatile and will not continue to stay volatile. It is uncertain, and it is likely to stay uncertain. We have added 12 new customers in the last 3 quarters, and those customers, some of them have ramped up and some of them are in the process of ramping up. That gives us most of the confidence to be able to see the sequential growth that we are looking for. Now we don't expect the bottom to fall off. And so while there are some risks, but not very substantial.

Okay. And on the revenue visibility numbers, sir, I mean, why is there a drop this time as well? I do understand that it is also to do with the top accounts not doing well. But given the fact that we've been adding new clients, so shouldn't that number start trending up now?

Like you pointed out, when we add new customers or renew contracts, that number goes up. But as customers consume, so as we accrue revenue, that number goes down as well as if we see compression in spends of certain customers, we, on our own accord, take down the visibility for the balance of the contract and bring it down to the run rate that we have seen. So those are the balancing factors. This quarter, what we've taken down or what's been consumed is a little bit higher than what's been added. In a number of previous quarters what's been added tends to be more. So a little bit of piece.

Earlier, our indication on tax rate used to be in the range of 19% to 20%. Now we are indicating a 27% tax rate. So why is there a change in our commentary on tax rate?

See, our tax rate was lower because we were accruing benefits with respect to carryforward tax benefits that we had from the past. Those have been consummated, those have been consumed, and we don't see any leftovers going forward. So what you see going forward is going to be the normal tax rate that you would take on par.

Yes. Just to add. So there will be normal tax rates which will be there and certain notional expenses, which are not eligible for tax, also add up to the effective tax rate. So that's why we are saying that with some benefits, if at all [indiscernible] then we'll in the vicinity of…

Next question is from [indiscernible] Crown Capital Partners.

Sir, just wanted to know with our guidance that you've given, maybe like in terms of margin, in this quarter, we've accrued some one-off expenses. So with revenue increase margin be a bit better than what we are indicating [indiscernible] in terms of margin, that's why [indiscernible] And in terms of growth that we are expecting, maybe FY '24 might not meet highly growth. But FY '25 can have a disproportionate growth? Or did we have any target that we can maybe do in FY '25, maybe can we at a level we think with the compressed growth that we'll touch don't expect 2025 see that growth can be higher at that point of time?

So I heard two questions. Your line was a little bit choppy. But I think your first question was that given the onetime expenses are behind us, do we see better margins? The margins that we've guided are EBITDA margins. So we are predominantly excluding any onetime expenses. One of the reasons why margins will be compressed a little bit starting with the impact of wage increases that we have done starting October of '23. That would be one of the key reasons for the impact to margin. I think your second question was, do we expect growth rates to break out in FY '25? I don't think the uncertainty is going to act like a switch where while the switch is turned off right now, it will certainly turn back on. We will see gradual improvements in growth rates over '25 I think. And as uncertainty lifts, we will start to see a healthier consumption environment.

And just wanted clarification. In FY '24, how much growth are we expecting, sir?

Early to mid-teens. The question was '24, correct?

Sorry for that, sir. Just wanted to ask for a clarification, in FY '24, how much growth rate are we expecting, sir?

Early to mid-teens.

And just new to the company, I just wanted to understand how does our revenue visibility work like the contracts that we have or over what period of time and could you just give brief explanation of how does that work? And what all can be impacted because, as you said, some things got consumed and some things are not getting added. So just a brief something on that.

I'll try to do that. It's the summation of the run rate value on the contract times the number of quarters left on the contract. So let's say, we have a contract that was set up for a period of 3 years. Let's assume that we have completed 1 year of that contract, and let's assume that, that contract is running at $1 million per quarter. So then when we set up that contract for 3 years, we would have taken the visibility of $12 million. Given that we have completed 1 year of the contract, we reduced from that $12 million, $4 million of visibility. And therefore, the balance that's left would be $8 million. Now in this period of 1 year, if the run rate on that contract went down, let's say, from $1 million to $750,000 or mostly, the run rate went up from $ 1 million to, say, $1.5 million, then what we would do is we would revise the visibility against that contract for the balance period to show the current run rate on that part. And then what I described to you is one line item in such a list and we tally up all 85 or all active customers and sum that up, and that's the visibility. Of course, in every quarter, we add the new customers that we add with the list as well as if we have any renewals, we had that, and we come up with a number.

I think that I understood it. So just one final question. Sir, the $350 million visibility would be on a rough frame, what would be the average length, like it's 3 or 2 years, what would be expected to be?

9 quarters is the weighted average.

9 quarters, yes.

9, right?

Yes, 9 quarters. So a little over 2 years.

Next question is from the line of [indiscernible] from RW Investment Advisors.

I hope I am audible?

Yes.

So I have 2 business-related questions and a couple of bookkeeping questions. So generally, how is the revenue model with client structured? Is it per learner basis, per employee? Or is it per year or per project basis also?

So do you want to ask all your questions first? Or do you want me to respond to one.

I'll just ask post your response.

Okay. So the way we look at revenue or the way we bill this customer is basis transactions that we do with our customers. We have different ways in which we deliver services. For example, we could be training or delivering training to our customers' employees or partners or customers. We could be creating training materials for them. We could be providing services to manage schedule and run classes for them. We could be providing services to buy third-party training for them. We could be building learning technologies for them. All of these services, we break those down as transactions when we write contracts or statements of work with our customers. So the statement of work could be running a task, a statement of work could be creating training programs, a statement of work could have managing training programs or buying training on their behalf. And we price each transaction based on what the transaction typically cost our customer. To do that, we put our margin and then come up with a mechanism for charging our customers for the transaction. And every month, we tally up how many transactions we bill and send our customers a bill against the transactions. So as I pointed out, a transaction could involve delivering training to many employees in which case we will get paid by the employee. In some transactions, it would be creating learning programs, which would result into billing our customers on the number of hours of training we created for them and so on and so forth. So it is transactional in nature. We set up price per transaction and we bill them on a monthly basis for the transactions that they consume.

So when you say they have come for renewal, it means that they'll stick as a customer?