NIIT Limited (500304) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '21 Earnings Conference Call of NIIT Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vijay Thadani, Managing Director and Vice Chairman of NIIT Limited. Thank you, and over to you, sir.

Thank you. Thanks for each one of you for joining us on the conference call, which is to brief you on the results of the first quarter of the financial year 2021. I have with me Sapnesh Lalla; Kapil Saurabh; and also Sanjay Mal, who's just taken over, I think, just at the last year's results time as CFO, but this is the first time he is joining this call as the CFO, and a number of our colleagues who are distributed wherever they are. As usual, we will follow the same process that we have followed before. One, that we would discuss the Q1 and FY '21 business performance. And just to make one statement, I think the company has shown an enormous amount of tenacity, resilience, and has responded with high agility and decisive actions to generate the kind of transformation that the company is going through as well as part of it is visible in the results. But Sapnesh has been leading this effort, and it's best that we hear from him. As usual, he will give us his initial brief, and then we will open it for Q&A. With those words, I hand you over to Sapnesh. But before I do that, I just hope that all of you and your families are staying safe and healthy, and I wish you the very best. All right. Sapnesh, over to you.

Thanks, Vijay, and thanks, everyone, for joining this call in the current situation. Please note, as always, the analysis here is on an year-on-year basis. Also, given the current scenario, we would also talk on a Q-o-Q basis for some of the numbers. Also, in accordance with the accounting standards, AS 105, the net result, revenue minus expenses of asset held-for-sale as well as discontinued operations is reported as a separate line below operating results. This includes the net results of the Schools business housed in our wholly-owned subsidiary. [Technical Difficulty]

Ladies and gentlemen, we lost the line of Mr. Sapnesh Lalla. [Operator Instructions] Over to you, sir.

Thank you. Thank you. I was saying that in accordance with the accounting standard, AS 105, the net result of asset held-for-sale as well as discontinued operations is reported as a separate line item below the results. This includes the net results of the Schools business, housed in our wholly-owned subsidiary, MLSL, which has been classified as an asset held-for-sale. Also, the results of the previous year have been restated for a like-to-like comparison. Going forward with our results and the key highlights of our results. Obviously, as all of us are aware of the COVID situation, COVID really is the highlight or is the cause of the results where we -- where they are today. The pandemic has caused an unprecedented health and economic crisis across the world. Starting in Q4, the governments globally have implemented some form of lockdown and placed various restrictions on businesses. These restrictions and requirements of social distancing have impacted businesses worldwide and NIIT's business is no exception. All our education and training -- all education and training institutions in India have remained shut. No in-person instructor-led training activity and enrollments have happened since March. The B2B businesses worldwide have been affected given that the customers are dealing with the crisis themselves. More specifically, the instructor-led training business is deeply impacted. I think as we look at the impact of our business, your NIIT has responded really from 2 points of view. The first one is the customer-centric point of view. And that point of view focuses on NIIT's ability to service its obligations while it takes care of the health and safety of its NIITians or its employees. While we moved our operations to our work-from-home protocol, NIITians have not missed a beat in servicing our customers. And I think that's testament to the fact that all our customers have stayed and continued to put their faith and trust in NIIT, just as several of them whose contracts have come up for renewal have continued to renew their contracts. That's been one dimension of our key response. The second dimension is around ensuring that we are able to transform our business so that we can take advantage of the digital transformation opportunity this crisis has put in front of all of us. This crisis has compressed the time of digital transformation to the next several months. And I think NIIT is working hard to ensure that NIIT is able to take advantage of the opportunity this represents. As I've mentioned earlier to you, our response has been agile and decisive. We were able to arrest potential de-growth through specific actions and recover profitability, which had sharply declined in Q4, while volumes from existing customers have reduced strong deal activity and velocity over the last few quarters and expansions at some customers has helped NIIT achieve a flat year-on-year growth rate. In Q1, we took significant actions to reduce costs to reverse adverse impact on profitability as witnessed in Q4. And we will continue to focus on cost control measures to sustain profitability while making prudent investments for long-term growth. Strong focus on working capital management and collections has led to reduction in DSO days to 51 compared to 57 in the previous quarter. As a result, our balance sheet is further strengthened in Q1. At the end of Q1, our net cash improved to INR 12,060 million (sic) [ INR 12,061 million ] as compared to INR 11,428 million on March 31. As I've indicated earlier, our response protocol has been premised on: first, the safety of NIIT's employees, the NIITians; customer continuity, ensuring that we meet all -- and meet and beat all our customer obligations; innovation in terms of new products and offers; cash conservation; cost control; and strategic decisions for digital transformation and portfolio rationalization. First, we enabled our workforce to shift to work-from-home globally ahead of lockdowns in all the respective geographies that we service. We prioritized support for our customers and ensuring continuity of operations as well as rapid transformation to meet changing customer needs in these uncertain times. NIITians have worked with focus and determination to launch new innovative offerings for our customers as well as going after new customer segments to take advantage of some of the opportunities that were in front of us. We transitioned a large part of our India business onto NIIT -- onto the NIIT digital platform and have started to ramp up digital customer acquisition as well starting in April of this year. We took strong steps for cash conversation (sic) [ conservation ], which is visible in the strong collections and improved DSO days. Actions for cost rationalization initiated during Q4 helped in reduction of expenses in Q1 as you would have noticed from our P&L. The result has been that the Corporate Learning business has had the highest-ever margin in the recent history, and we've narrowed the losses in the Skills & Careers business. We had also taken strong and decisive actions for portfolio and cost rationalization, and we saw some of those actions, as I mentioned earlier. We also have transitioned, like I mentioned earlier, our India Career Education business and the B2B business to a digital business, and this transition is starting to progress well. We also decided to divest our Schools business and have put it as an asset held-for-sale. In the next couple of minutes, I will talk through the highlights of our Corporate business. The Corporate business is now 88% of NIIT's revenue. The Corporate business grew 18% year-on-year and 2% quarter-on-quarter with the revenue now at INR 1,785 million. In constant currency terms, the business was up 8% year-on-year. And in this business, as I've mentioned earlier, a significant part of what we do is instructor-led training delivery and in-person and instructor-led training delivery. This is a single part that was impacted most. In addition to this, learning being a discretionary spend has been impacted as our customers face uncertain times that they are in. Some customer segments such as energy and aerospace have been more impacted compared to others. But while we see these challenges in terms of lower volumes with several of our customers, we did take advantage of the high deal velocity we saw in last year's Q3 and Q4. And some of the new customers and the expansions that we have had helped keep our head above the water and show growth from a Y-o-Y perspective. And so while several of the existing customers showed lower volumes, these gaps were filled by the new customers that we had signed up over the last few quarters. Several of the new customers who are in the Life Sciences space, I did want to point out that Life Sciences now is the fastest-growing vertical at NIIT. We now have 8 MTS customers in Life Sciences as compared to 2 only about 2 years ago. We took strong actions to help margin recovery, which had fallen sharply in the previous quarter, and this is so despite increased investments in sales and marketing. The favorable exchange rate and a mix to higher gross margin products has also helped with the margins of this business. There were obvious savings on travel and facilities used as well as tight control on expenses on a number of other line items. As a result, the EBITDA margin posted a sharp increase to 17%, up 933 basis points compared to previous quarter and 283 basis points on a Y-o-Y basis. The EBITDA for the Corporate business stood at INR 312 million. And while because of the COVID-19 situation we saw some of the volumes with existing customers go down, our deal velocity has remained strong. The Corporate business added 3 new MTS customers during the quarter and increased the scope of work for 1 existing customer and renewed 1 customer during this quarter. This comes at the back of adding 14 new logos last year and 5 in Q4 of last year. Each of the new customers added is a leader in their respective domains. In terms of additions, we added 1 global leader in social media and 2 large Life Sciences companies. The customer tally now moves up to 55, signifying the continued trust our customers have placed in NIIT. The revenue visibility is at 600 -- INR 263 million despite some of the adjustments due to lower volumes that some of our existing customers have faced. As I mentioned a little bit earlier, our penetration in Life Sciences increased. We added 2 new Life Sciences customers in Q1, and our tally of Life Sciences customers is now at 8. Going forward, we see continued lower volumes till the uncertainty starts to go away. The businesses are continuing to see contraction or uncertainty -- or our customers' businesses are continuing to see uncertainty, and therefore, we'll continue to see uncertainty in our business. And while the situation is dynamic, we believe that we would be able to maintain our current run rate in revenue and be in the range in terms of profitability for the year. We have increased investments in sales and marketing during the last few months. And as the environment improves, we could see some volume pickup towards the end of the year. Now to spend a few minutes on the Skills & Career business. Q1 saw the full quarter impact of COVID-19. The one difference between the western markets where our Corporate business operates and the Indian market where our Skills & Career business operates is that the rate of adoption of digital given the connectivity and the device availability is a tad bit slower in India as compared to the western markets. And so the India B2C business saw the highest impact due to the lockdown of education centers and that too for the whole quarter. In India, the B2B business also suffered on deferrals and cancellations of face-to-face trainings, and more importantly, because of the hiring sentiment in India being low for both IT and BFSI as well as the adoption of digital means of education being a little bit lower in India. While new enrollments have been impacted, learning delivery for our Career Education business was transitioned to full digital operations during this quarter. The adoption, as I mentioned, in India has been a little bit slower, given connectivity and device availability. And therefore, the pace of adoption is still slow. But my expectation is that this space will pick up over the next few months. The opportunity that we have in India is the fact that COVID-19 has compressed adoption cycles for digital transformations across industry. And this shift, I believe, is here to stay. The same compression of digital transformation cycle is happening at NIIT as well. NIIT has been a pioneer in use of technology to improve learner efficiency as well as to drive learning effectiveness. And we are committed to using the digital platforms that we have developed for global markets in India to ensure that we are able to provide convenient access of education -- high-quality education to our students such that they can achieve the outcomes that they expect from NIIT. Given this, NIIT has decided to rationalize physical capacity of its education centers and transition to a digital education delivery model. This includes learner acquisition, academic delivery, learner services, alumni engagement, industry engagement and placement. From April on, all of our enrollments and education delivery have been switched to digital. In terms of performance, while the revenue for our Skills & Careers business declined quarter-on-quarter from INR 358 million to INR 233 million, strong cost control and cost-related actions ensured improvement sequentially from an EBITDA perspective to INR 68 million negative versus negative INR 100 million. The transition to digital and continued rationalization of costs driven essentially by rationalization of physical capacity will help further in the coming quarters. We're making significant investments in sales and marketing and adapting the NIIT digital platform to specific situations in our Career Education business and B2B business in India and expect enrollments to ramp up over the coming quarters. Overall business volume would remain impacted for the rest of the year with possible partial recovery towards the end of the year. We continue to believe very strongly that demand for deep skilling and hiring of skilled professionals just in time is likely to remain an important priority for all the business segments we serve, including IT and BFSI. As companies transform, their need for employees that are not only better trained but are more confident in their learnings would precipitate up to maintain higher productivity levels at our customers. Overall, from an NIIT perspective, the NIIT revenue is at INR 2,018 million, flat on a Y-o-Y basis. The EBITDA is at INR 243 million, up from INR 31 million in Q4. The EBITDA margin for Q1 is at 12%, up from 1% in Q4 FY '20. The days of sales outstanding has improved further to 51 as compared to 57 days at the end of Q4 of last year. The interest and treasury income is at INR 323 million. As a result, the cash situation has improved to [ INR 12,876 million ]. The overall headcount is down by 67 headcount compared to previous quarter at 2,533. I think -- as I sum up my prepared comments, I think what is remarkable about this past quarter is the resilience that NIIT has shown in the face of stiff challenges thrown to us because of this COVID crisis. I think it's evident -- the robustness of NIIT's value proposition is clearly evident in the trust and the faith that its customers have posed in NIIT and the grid and the spirit of NIITians in the face of these challenges. I think NIIT, and specifically, NIITians have done a remarkable job in managing these challenging times, and they are charged to ensure that we continue to do our best in the coming quarters. With that, I wanted to return back to Vijay to take us through the rest of the prepared comments.

Thank you, Sapnesh. I think given the time that we are left with, I would like to open it for Q&A, and I'm sure there are many questions, which all of you have. So operator, can you open it for Q&A? And then if there's anything left, then we will add that in the end.

[Operator Instructions] The first question is from the line of [ Pooja Verma ] from ICICI Bank.

Pooja here from ICICI Bank. I think you are able to hear me.

Yes. Thank you.

Yes.

Yes. Actually, I just want to know the Brexit impact on your subsidiaries. I heard you have a subsidiary in U.K. also and in Ireland. So what are the precautionary measures we are taking for that?

Sapnesh?

We have not had any material impact because of Brexit, either in our subsidiaries nor in our business with our U.K. customers.

Okay. So you mean to say the overall impact would be low?

Yes. We've not seen a material impact because of Brexit.

We'll move to the next question which is from the line of [ Ganesh Shetty ], an individual investor.

Sir, congratulations for NIIT team for good set of numbers in a very challenging situation. Sir, my -- yes, my question is regarding, again, every quarter, I'm touching upon this aspect of Skill & Career (sic) [ Skills & Careers ] business, where we are showing continued losses for many, many quarters now. And looking at the trend and looking at our Corporate business, which is contributing to 88% of our total revenue, is there any plan to reduce further our exposure to Skills & Careers business so that at least we can maintain no profit, no loss at the career business. Can you please highlight this?

Yes. Sure. Thanks for your question. As you pointed out, the Corporate business is majority of NIIT's businesses and is showing reasonable growth given the current times. We feel that there is an opportunity to do significant digital transformation in our Skills & Careers business and transform it, given the opportunity that's available for us for that business, specifically in India and a few other geographies. As I'd mentioned earlier, we have built global platforms to offer digital learning for our customers globally, and we are going to be able to leverage these platforms as we transform this business to achieve a lower cost base and improved unit economics.

Okay. Sir, my second question is regarding our cash balance and the digital economy, which is opening up very steadily. So I just want to ask you apart from learning solutions as far as digital is concerned, are we planning to have any other sort of services like technology services as now we are out of NIIT Technologies and we have a great expertise in technology. Is there any other way we can provide our customer with a digital experience apart from learning? And this is in my perception of a new business venture where NIIT can get it. Can you please throw some light on this?

Thanks. Thanks for your kind words. Current mission and vision is focused on education and training as a business. And so no plans at this time in terms of diversifying away from education and training.

Enough to say that in education and training, there is a huge opportunity. And with -- as you rightly pointed out, our strength in technology, the use of technology in delivering learning, which has -- which is more outcome-driven is more possible with technology-based training. And I think that's what the whole team is completely focused on. Even the pivot that we have been -- the team has been able to demonstrate is largely due to, of course, the internal resilience of the organization, but more importantly, the technical -- technological progress that the company possesses. So that's where we will deploy all our resources.

The next question is from the line of [ Jay Daniel ] from Entropy Advisors.

Yes. Sir, you have made a loss of around INR 7 crores in the Skills & Careers business. What is the trend going forward? I mean you have brought your -- brought down your loss considerably. But where do we see this number going forward, I mean, in a difficult year?

Okay. Thank you. Good question. I think Sapnesh will answer that.

Sure. Thanks. Thanks for asking that question. I think, as I've mentioned earlier, this business is transitioning towards a digital business. We have implemented the NIIT digital platform. We are in the process of customizing it so that the India-specific use cases are able to see student experience that is top class, the student experience that they have come to expect from someone like NIIT. So there, there is investments. Further, there are investments to rejig our team from a capability perspective to ensure that this business goes in the right direction. So we will continue to make investments to transform the business into a digital business. And on the other hand, given the better unit economics of our digital business and lower physical location-related costs, so on one side, we should see reduction in costs, which should narrow our losses. But on the other hand, we'll see some investments that can create a strong foundation for this business as well.

So would it be correct to assume that your losses will keep declining from here? If it'll, I mean -- or...

As the business ramps up, yes.

So until -- INR 7 crores will be the worst, I mean, from the -- our future quarters will see lower losses?

That is possible.

Okay. And your Schools business still loses money. Around INR 4 crores was lost. So I mean, could we get to a situation where it just stops bleeding?

Yes. Hopefully, we would be able to see that over the next few quarters.

So in your losses of INR 7 crores plus INR 4 crores, around INR 11 crores of loss, that should come down. Schools was INR 7 crores and -- Schools was INR 4 crores and Skills & Careers was INR 7 crores. So this going forward will keep coming down.

It should. And again, as I've mentioned earlier, the Schools business is an asset held-for-sale, and that should also result into losses getting a little later.

Okay. Once it gets monetized?

Right.

Hello? Yes. And your depreciation is around INR 16 crores. Now part of this is amortization of content. How much of the -- how much of it is amortization of content?

Predominantly.

Predominantly, it's amortization of content. Okay. So how will this trend going forward -- because in your corporate training business, I think we'll have to look at EBIT margins rather than EBITDA margins, because content amortization is a running expense for you.

Content amortization is against a specific project, and that investment will come to a closure towards the end of this calendar year. And after that, we should not see an increase in investments, and therefore, over time, depreciation should go down.

Okay. So this amount of INR 16 crores, will it be the peak or will it increase? Because it's come down Q-on-Q.

Well, there are certain aspects which will go down, just like I pointed out, the investment in one of the projects against which there is significant amortization or significant investment, that -- the investment will taper off towards the end of this year.

This is the real estate thing, Canadian real estate corporate training, which we do, right?

That's correct.

Okay. And stack -- and last question, StackRoute and TPaaS account for 40% of Skills & Careers? Or it's gone up like the...

Yes, that's approximately right.

Okay. B2B will recover faster than other business in Skills & Careers?

They should. As the hiring sentiment improves, the B2B side will improve. And B2C should follow again as soon as the hiring sentiment improves.

I wanted to just add to this. Learning business is not a very capital-intensive business normally. But there can be a specific project, in this case, this particular project, which has resulted in a higher amount of development work, which will be amortized over the period of the project itself. So it is not a normal depreciation and normal content addition that we are capitalizing. So I just wanted to clarify that. Second, if another project of this kind -- and if another project of this kind was to come up, then obviously, we would share that with you. And then, of course, if there is a capital expense involved, we would be sharing that. But other than that, we are past the peak of CapEx in this project as well. And there are only 1.5 quarters, perhaps more of work which is left, which needs to be completed, after which this is in a full option maintenance work.

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