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

Ladies and gentlemen, good day, and welcome to the NIIT Learning Systems Limited Q2 FY '25 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 MD. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone who's been able to join this call. Truly appreciate your joining us in this busy results season and also thank you for your continuing interest in NIIT Learning Systems Limited. We want to cover today an update on our second quarter of the financial year ending in March '25. The second quarter from July to September, performance of the company as well as the outlook for the business as we go forward. As a backdrop, I would only make one statement and then I'll hand it over to my colleague, Sapnesh. It's a very interesting situation where the economic indicators are all showing positivity but the sentiments with our customers are on a weaker side and I think some of that has impacted our performance in this quarter as well. So, we'll talk more about that. I have with me Mr. R S Pawar, the Chairman of the company, Sapnesh Lalla, the CEO, Sanjay Mal, who's the CFO and other members, senior members from our finance and Kapil Saurabh who looks after Investor Relations and M&A activity. They are joining us and we'll all be hopefully be able to answer most of your questions. Without further ado, I would like to hand you over to Sapnesh Lalla for an initial briefing and then we can get into Q&A.

Thanks Vijay and thanks everyone for joining. In our prepared comments, I will review the financial numbers representing the performance for the second quarter as well as provide color on our expectations going forward. Our revenue stood at INR 3,974 million. It was up 4% year on-year. It was up 4% year-on-year in constant currency terms as well. The revenue, however, was down 2% quarter-on-quarter. The second quarter generally sees low volume compared to Q1. We are a training business and that tends to be a full contact sport. The holiday period in Europe results into lower training activity and volumes. While we expected to see sequential growth in the second quarter in spite of the summer vacations that several of our European customers face, we did expect sequential growth in Q2 this year driven by addition of new customers as well as ramp up of customers that we had already acquired. We had also started seeing some green shoots and that's the reason why we thought that we will see a quarter-on-quarter growth in Q2 when we completed Q1. However, as I mentioned earlier, our revenue on a quarter-on-quarter basis is down 2%. While the business continues to see strong customer additions as well as marginal pickup in a few sectors, the fact is that we saw robust improvement in revenue visibility. We added two new customers this quarter. However, the volume is down quarter-on-quarter primarily due to lower than-expected spending by management, consulting and professional services firms who are some of our large customers as well as lower volume in the North American real estate business. We continue to expect acceleration in the second half of this year on a sequential basis due to new customer additions including the impact of a large customer ramp up where we acquired that customer in the previous quarter. The year-on-year acceleration, however, is now expected to be pushed by a quarter. So, what we were expecting to start in Q2 is likely to start in Q3 and gather pace in Q4. Our EBITDA was at 936 million. It was up 3% year-on-year and down 9%. EBITDA margin was at 24%. It was down 27 basis points year-on-year. Please note that the wage increments this year were effective July 1st as compared to being effective 1st of October last year. The impact of these increments and impact of lower revenue was partially compensated by continuing improvement and productivity as we saw this past quarter. The depreciation was INR 153 million. The net other expenses were 38 million versus 72 million in the last quarter and 66 million in the same quarter last year. Treasury-related income was 117 million versus 82 million last quarter. Acquisition-related expenses were 91 million versus 88 million last quarter. Demerger-related non-operating and transitionary expenses were at 7 million. Other expenses of 57 million including a loss, foreign exchange loss of 40 million and net other miscellaneous expenses of 17 million. This is as compared to 53 million in the previous quarter. Tax was at 175 million. The effective tax rate has been higher than normal for the company as consolidated P&L includes impact of certain notional P&L charges not admissible to tax. However, the tax rate was lower in Q2 due to reduction in long-term capital gains taxes on income from debt mutual funds. We expect the tax rate for the full year to be around 27% to 28%. The PAT for Q2 was INR 570 million. It was up 22% year-on-year versus INR 469 million in Q2 last year. The EPS is at 4.2 per share versus 3.5 in Q2 last year, up 21% year-on-year. Over the last two years, as we have mentioned in the past, the business has been resilient in the face of heightened uncertainty. And while we expected the uncertainty to start settling down, it has not settled down as yet. While we face significant uncertainty, the business has improved margins. The growth predominantly has been driven by ramp-up of new customers and improving wallet share from existing customers. Even as consumption continues to compress, and this quarter we saw sharp compression across management consulting and professional services firms, we are seeing some green shoots in select customers. Banking and life sciences are leading year-on year growth, while tech as a segment is starting to see recovery for us. As we have discussed, the company is continuing to create new outsourcing opportunities driven by investments in new capabilities. However, continuing uncertainty and therefore pressure to cut costs across industries is coming in the way of growth. During the quarter, we added two new MTS customers, one a top five FMCG leader and the second a top ten energy company. In addition, we renewed four contracts and we had one scope expansion. The company continues to maintain a track record of 100% renewals, reflecting continuous improvement in our long-term competitive position. Our visibility stood at INR 368 million. This was up from INR 350 million previous quarter. The number of MTS customers now is at 91. While our customers have seen a disproportionate focus on costs and that is resulting in lower consumption with our existing customers, this disproportionate focus on costs is starting to create an acceleration in outsourcing opportunities for us With our investments in sales and marketing and consulting and advisory services and a reputation as a trusted and reliable market leader, we believe we have an opportunity to gain a larger share of the upcoming opportunities and to accelerate growth. The deal pipeline continues to be strong, including large outsourcing deals across different market segments, including technology, professional services, automotive, among others. The business continues to win a significant number of awards. We earned 63 Brandon Hall Awards, along with our customers, including 31 Gold Awards. NIIT MTS was accredited Gold Standard for the ninth consecutive year by the Learning and Performance Institute, and it was named to the training industry's top 20 experiential learning companies for the fourth consecutive year. The balance sheet and cash flow metrics remain strong. DSO stood at 50 days as compared to 55 days last quarter and 46 last year. Cash at INR 7,370 million, and do note that we paid out the dividend and annual variable compensation during this past quarter. The capex for the quarter was at INR 118 million. The cash flows continue to remain strong, free cash flow of 3,078 million over the last 12 months. The company ended Q2 with 2,323 employees. This was down 35 quarter on quarter and down 145 year-on-year. As has been our trend, we continue to make disproportionate investments in creating new capabilities and in sales and marketing, continue to invest in use of generative AI as it gains prominence in our customer conversations through, even though there is still hesitancy to adopt AI based learning solutions enterprise wide. We continue to make rapid progress in leveraging AI across multiple aspects of our work, both to gain productivity improvements as well as to make more effective learning solutions for us. In projects and work streams where we are using AI, we are becoming significantly more ambitious in terms of learning outcomes for our customers, and are also starting to see meaningful improvement in efficiency. I would like to reiterate that rapid transformation in the industries we serve, going through digital transformation, decarbonization, acceleration in biopharma, as well as AI, present a significant opportunity for us. We see a number of organizations transforming and restructuring to improve their cost structure and achieve higher variability in their cost structure. We are starting to see acceleration in outsourcing opportunities going to this trend, and feel that we are uniquely positioned to take advantage of these and continue to lead the industry in terms of growth and profitability, specifically as some of our competitors are distracted at this time. We also have an active pipeline of inorganic opportunities that we are pursuing, and we'll report more on this as we move forward with any of them. We continue to see robust contract pipeline and ramp up in new customers. However, our revenue this quarter is lower than expected, primarily due to reduction in consumption levels in the management, consulting, and professional services segment, as well as the real estate business in North America. As a result, while we expect strong sequential Q-o-Q growth in Q3 and Q4 on the back of new customer ramp ups, including ramp up of a large deal that we signed in Q1, our Y-o-Y acceleration is delayed by a quarter. Consequently, for the full year, we expect to grow at 7% plus in constant currency terms, versus an earlier expectation of growing between 12% and 14% on a year-on-year basis. The margins are expected to be at the higher end of the guided range of 22% to 24% for the full year. With that, I did want to close by saying that if you look across most of our business metrics, we continue to be executing robustly. We've seen a small hiccup given the environment, and we expect that we will be able to get past this hiccup as new customer ramp ups start to take momentum. Thanks, and back to you, Vijay.

Thank you, Sapnesh. At this point of time, I have nothing to add. I wanted to give maximum time for everybody to ask questions. So operator, can you please open it up for Q&A.

[Operator Instructions] The first question is from Pranay Roop Chatterjee from Burman Capital.

My first question is on the headcount. Usually, given you're an employee driven organization, usually in similar businesses, we track the headcount to understand the traction or immediate short-term traction. But what I've been noticing over the last 3, 4 quarters is that the revenue per employee, if at all that metric makes sense, is actually going up because your revenue is increasing gradually quarter-on-quarter, but your employees are going down. So I just want to understand this in a two-fold manner? One, why is it going down? Are you trying to optimize your business? And hence, it will remain at a lower level versus before, and eventually there will come a time when the headcount will start increasing in line with revenue? Or how should we look at the headcount figure vis-a-vis your revenues?

So we are a technology enabled business, and we have continued to increase our investment in technologies that improve growth, the efficiency of what we do as well as effectiveness of how we teach. And in line with that, given that our growth has been marginal or mid-single digits or so it is logical to see year-on-year reduction in the overall number of employees. Like you pointed out, as we see improvements in productivity, our revenue per FTE or revenue per employee starts to go up.

So my question was more around then eventually when things normalize, and let's say you see growth coming back in Q4, would this headcount then start increasing in tandem with revenue? Or how should we look out for the headcount number as a key KPI? Because right now it's not in tandem, right? And hence the question.

Yes, I mean, we will continue to make investments to improve efficiency. However, as we get into double-digit growth, we will see some improvement or some increase in overall headcount as well.

Got it. Okay. So second question...

In continuation to that, you should not consider head count as a lead indicator for a short-term performance improvement because there are many forces at work.

Okay. My second question is on your sector-wide performance. So there has been an uptick in BFSI and Tech and Telecom on a quarter-on-quarter basis. Tech and Telecom. So my question is, is this a trend more like a one-off or is this going to continue because of ramp-up that is already happening specific to these two sectors? And hence linked to this, you had mentioned that you expect second half to accelerate. So if I look at last year's trend, Q2 was a weak quarter, and then Q3 and Q4 saw about 2% quarter-on-quarter growth? So if we have a similar 2% quarter-on-quarter growth this year, then we'll end up FY'25 with about 5% growth. So is this a fair number to deal with or do you expect it to be faster for some reason? Just your thoughts on the same.

So you asked a number of questions. So if I miss any, do remind me. But first on growth, we expect our...

Participants, please stay connected while we wait for the management to join back.

It looks like we got disconnected and I'm not sure when we got disconnected, but the person who was asking...

I asked the question and you said I had multiple questions, from there you got disconnected.

All right. So let me repeat my answers. I think the first part was about growth in the second half of the year. We expect that for the whole year, we will deliver growth of 7%-plus. And for the third quarter, that growth would be about mid-single digits on a Y-o-Y basis. And that would accelerate to double-digit growth on a Y-o-Y basis in Q4. I think your second question was related to how are we looking at BFSI as well as tech as a vertical. So for tech, we had seen compression over the last 2 or 3 quarters. And now we are starting to see recovery. And we believe that this recovery will catch momentum over the next couple of quarters. BFSI has been strong for us over the last few quarters on the back of ramp-ups with our existing customers as well as addition of new customers. We have a strong pipeline of new additions in BFSI. And we expect the momentum to continue in BFSI.

Next question is from Siddhant Dand from Goodwill.

I was just saying that our cash flows have remained very good. That's the nature of the business. There's been a cash pile-up. So could we understand why the dividend rate continues to be so low? And just like other IT companies, why don't we have a higher dividend rate? Because we anyways have cash flows for acquisitions. And we have a large bank balance.

Sorry, what was the question is about dividends. The cash flows have been strong...

Or just shareholder payout in general?

Okay. All right. So I think I mentioned this before. That as a company, what we believe is that the company should have a consistent dividend-paying policy. Which means it should pay dividend consistently irrespective of ups and downs in the business. Because many of our shareholders would like to see a consistent increase in this dividend income. And typically, we don't have wide swings. Unless there is a wide swing in the fortunes of the company itself. And in line with that is the way we have been giving dividends. Now the strong cash that we have in the balance sheet, we have had in the past done buybacks and distributed money to the shareholders. But this time this cash which we are having and are creating is meant for the future expansion as well as the inorganic activity that is underway. Of course we haven't announced anything after St. Charles. St. Charles was the last acquisition. But we are on record in the past to have it said that we expect to make a number of acquisitions in the next 3 or 4 years. Of course, the timing of that can only be decided on the basis of when the deal gets finalized. Even right now we are in conversation. And therefore, some of this money will definitely get utilized. So I think we are deploying our capital in line with our stated objective. The second thing which I would like to say there is a great opportunity facing the learning industry because of the way learning is going to get transformed with introduction of AI and generative AI. And I think this is an area where the company has already taken a very strong position. Internally I call it the pole position when we compare ourselves with our contemporaries. And we think that this is a significant area of investment which the company will make. The results will not commensurate immediately with the investment that we make. And to that extent there will be a dent on the cash flows. I think these are the two events for which we are preparing. And I think both of them will serve the company and the shareholders very well.

One other thing I might add Vijay is that most of our customers tend to be the top five or ten of their categories. And when they look at choosing a partner, they like to work with partners who have strong balance sheets. So having a strong balance sheet is certainly a plus when we are in a competitive situation.

Sir, I have one more question. In the exceptional items, there's legal, professional and other strategic initiative expense. So is it the M&A expenses that we are working on acquisitions and finding those?

Yes. So I think as we continue to scan around and prepare strategies for inorganic activity we do spend money on getting the right advice and doing the right study. And I think that is an expense which is getting incurred as we speak. And if you notice it was there last quarter.

Yes, correct. So this is -- would you say this is onetime in nature? Or would be repetitive for a few quarters?

I don't think these are -- I mean you get a study done or you get some research done. It has a starting point, it has an ending point, so. And it's not only for inorganic, it's also for organic growth. So these are a number of studies that you continue to do.

The next question is from Vimal Jamnadas Gohil from Alchemy Capital Management. We'll move to the next question, as there's no response from the line of Mr. Gohil. The next question is from Jinal Sheth from Awriga Capital Advisors.

So the first question is that, when you set your expectations through guidance of growth what were the key indicators or the interactions with clients which base your growth of guidance on? And I'm asking this because we have cut guidance by half. So going forward, how confident are you that this guidance will be delivered?

So as you might expect, we do have conversations with customers. We have conversations with customers often. However, the level of uncertainty across some of our customers ended up being higher than what we had expected. Some of our professional services firms have their year-end in the May-June time frame. We expected their new budgets to open up. So we did have indication that the new budgets would be down 10% to 15%. However, as they opened up, they opened up a little bit late. But more importantly, they were down more than what they had indicated earlier. Maybe they're keeping it for the later quarters. But what opened up was lower than the 10% to 15% down expectation that we had received. Second, like I pointed out earlier, our North American real estate business was hurt by not enough in terms of lowering of interest rates. And the real estate market continues to be tough. And given that, we did not see the bump up that we were expecting to see post the July holiday in Canada.

Okay. And in just a continuation for my second question is that over the next 3- to 4-year framework what growth trends do you believe that this business model can deliver, assuming normalization of the environment?

See, I would say 2 things. The typical growth trends that we can expect are in the 20% range. Those are growth trends that we have seen in the past. And I think we are able to generate those same growth trends going forward as well. There is, however, an area that I wanted to mention and focus on, specifically, whenever markets go through deepening uncertainty there is significant pressure on costs and the compression in spend that you saw that have affected this quarter were a product of that. But what we also see is that, that same pressure on cost and desire to transform to a lower cost basis as well as increased variability results into acceleration in outsourcing, and we are starting to see this phenomenon. Our pipeline is stronger than it has been. We are also starting to see multiple large opportunities in our pipeline, which we have not seen in the past. In the past, we have seen 1 or 2 large opportunities in the pipeline. At this point, we have multiple. And I think it's because of the sustained uncertainty in the market and the desire to take cost out and achieve high variability. I think given our market position, we are positioned very well to gain a large share of these opportunities, and that has the potential of accelerating our growth rates over the next couple of years, and then those growth rates will continue to normalize towards 20%.

Just to clarify, when you mentioned 20%, you're talking about organic?

Yes.

Next question is from Ganesh Shetty, he is an Individual Investor.

Just I have one question regarding our new energy initiatives and any client acquisition in this field and how this particular sector is progressing as it is a new one. Can you please explain?

I'll reiterate the question that Ganesh asked. He wanted to know the progress in the new energy or renewable energy sector. It's been about a year since we made a minority investment in an entity called InnoEnergy, who is a significant investor in renewable energy companies in Europe. We believe that we have a strong partnership with them. Through them, we are able to get into large opportunities that can help us acquire new and large customers. In the last 1 year, we've been able to acquire 1 significant sized customer through that relationship, and we expect that we will be able to add more customers through the relationship that we built with the InnoEnergy.

Next question is from Raaj from Arjav Partners.

Sir, I just skipped the part on the guidance which you gave. So for FY '25, we expect it to grow around 12% to 14% range, am I right?

Our initial guidance when we started FY '25 was to expect a growth of 12% to 14% year-on-year. We have revised that guidance to 7-plus percent at this time.

All right. And for FY '26 onwards, you are expecting around 20% growth for next 3 to 4 years on a CAGR basis?

From a long-term perspective, we are expecting 20-plus percent growth. Of course, it will ramp up to 20% over the next few quarters.

Next few quarters. All right. And sir, currently, how much is our outstanding pipeline?

We don't disclose the total value of our pipeline. But our visibility, which is an indicator of the contracts that we have in place at this time is INR 368 million. It's up from INR 350 million last quarter.

Understood. Understood. So for FY '26, will it be a better year than FY '25. Do you have a visibility over there?

Yes. We expect that FY '26 will be a stronger year in terms of growth as compared to FY '25. At this point in time, we haven't exactly figured out what specific growth we will see, but we do expect it to be higher growth year as compared to the current year.