NIIT Limited (500304) Earnings Call Transcript & Summary

Okay. Thank you very much for joining this call this morning, which have been organized at a short notice, but there was tremendous interest in the investor community on the latest acquisition that we have made of St. Charles Consulting Group. There were certain clarifications that we wanted to give as well and answer questions and also explain the transaction much more in detail. This meeting is being recorded because it has to become a part of transcript as per the regulations. And to that extent, we would also have the transcript available at the end of the meeting, and it will be updated on the website. So without further ado, I would hand you over to Sapnesh Lalla, who will take us through the whole -- a short slide presentation, which explains the rationale of the deal, as to how we are going about it and the whole earn-out structure. So with that, over to you, Sapnesh.

Thanks, Vijay. And thanks, everyone, for joining. We appreciate your time and interest in NIIT and the inorganic activity that NIIT is pursuing. This discussion is specifically around the acquisition of St. Charles Consulting Group, a company based out of Illinois near Chicago. The company, as I mentioned, is based near Chicago and Illinois in the United States. The company serves 12 out of the 15 top global management and strategy consulting companies globally. It has a long-standing and trusted relationships with its customers. Some of their customers have been with them for upwards of 10 or 12 years. The company has been in operations for 20 years overall. They are seen as a strategic learning partner to the global strategy and management consulting companies. These include the top 4 and others. St. Charles Consulting Group has a network of 500 management, strategy and learning consultants in their consultant network, and several of them are used on different projects depending on the skill set and the requirements of the projects. Their solutions use a number of different practices that they have. But overall, they provide -- their solutions are targeted to creating strategic learning interventions for their key customers. As I have mentioned to you in the past, when NIIT's inorganic strategy focuses on adding new capability, new markets and new geographies to its existing portfolio of offerings. The St. Charles acquisition adds a new market segment to NIIT's list of customers or list of market segments, the market segment of management and strategy consulting firms. This market segment is known to spend significantly more than average on L&D. They spend approximately 2.5x on LND as compared to average Fortune 1000 companies. It also creates a new capability for NIIT by way of which NIIT would get a seat at the table. When strategic learning interventions show up for organizations, Fortune 1000 organizations are looking at strategic learning interventions, NIIT would have a seat at the table and have the capability to create and deliver those. As I have mentioned in the past, talent and talent transformation is in the top 5 agenda items for every CEO, and this additional capability will give us significant strength and create distance between NIIT and its competitors as we look at large annuity relationships with our global customers and global prospects. This is a slightly more detailed view of what I just said. So as you can see, it adds a new market segment as well as a new capability for NIIT. From a financial perspective, the company did approximately $21 million in calendar year '21. This was up 57% year-on-year, predominantly on the back of pent-up demand with their customers. The company expects to continue to grow at a reasonable pace in 2022 given that it has -- continues to have momentum. The company operates with a very lean structure. Like I mentioned, it has a network of over 500 management and learning consultants, and the margins are likely to be a creator to CLG margins. This acquisition was completed for a fixed consideration of $23.4 million in return for 100% ownership stake in St. Charles. The basis for -- the valuation was a 7x EBITDA multiple for projected '22 numbers. The balance is likely to be paid as an earnout over the next 4 years. We have capped the maximum to $65 million, and given the management team an opportunity to earn more by overachieving on the base case. I think, overall, the deal would be profit-accretive, margin-accretive to NIIT CLG business. And if they were to meet their stretch goals, they would be growing at the growth rate, which is in line with CLG growth rates. At this point in time, I'll conclude my prepared comments and then open it up for any questions, Divakar.

Thank you, Sapnesh. We'll now open the floor for question and answers. [Operator Instructions] So with that in mind, the first question comes from Vimal Gohil of Alchemy Capital.

Congratulations to the NIIT team for the acquisition. Sir, I just wanted one clarification on the earnouts. So these earnouts will be broadly distributed at -- I mean the $41 million earnout will be broadly distributed at $10 million for the next 4 years. And after taking that into account, will we be -- are we saying that this acquisition will be accretive?

So a couple of things. I don't think I said that the announced would be distributed $10 million a year. There is a structure that we have created, which is a progressive structure. The cap for the total would be approximately $41 million, and that would be achieved when the management team is able to achieve a stretch goal. I think you had a second question. What was the second question?

No. So I just wanted to clarify that given that, I mean, after the earnout, so do we still -- our assumption of this acquisition being accretive to margins is after considering the outcomes, right?

Yes.

I would actually like to correct that a little bit. The earnout structure is $65 million.

Total capital amount.

The $65 million is a cap, which is a cap, which has to be declared as per accounting norms and booked as such. That is for overperformance. The acquisition will be accretive even if they meet their base projections. They will be margin accretive if they even meet their base projections right?

The next question is from the line of Shradha Agrawal.

Just one question. Is there any client that we are already dealing with? Or is there any client overlap with the acquisition that we've done?

No, none materially.

And you said that you would be now working with 12 of the large 15 consultancy companies, professional consultancy companies?

Yes, strategy and management consulting companies.

And what is the scope of cross-selling that you see in CNG overall because of this acquisition?

Sorry, go ahead.

Please go ahead.

Like I pointed out, the strategy and management consulting companies as a vertical spend significantly more than what an average Fortune 1000 company spends per employee per year on LND. The capability set that St. Charles has today is focused predominantly on strategic learning interventions. And NIIT has a significantly broader capability set. So given that, we see 2 areas of synergy. The one area, which would be obvious, is to add the capabilities that NIIT has to St. Charles' capability so that their share of wallet from their existing customers can increase. On the other hand, NIIT CLG business has 70 other customers. And a lot of them also are looking at help from the point of view of strategic learning interventions. And with this capability NIIT will get a seat at the table to pursue strategic training interventions. So there is a significant synergy opportunity.

The next question comes from the line of [ V.P. Rajesh ].

Congratulations. Just one question. What is the revenue and EBITDA for St. Charles for the first 3 quarters of this calendar year?

Until those numbers are completed for the year, we would rather not talk about it. We will talk about it for the quarter and period until then or, at least, the quarter that they are going to be with us as we declare results for Q3.

Okay. But if I may just ask one more. Year-on-year, would you say the revenues have grown this year?

Yes, they are likely to grow at a reasonable pace.

Okay. For the first 3 quarters also, right?

Yes.

I appreciate you kind of keeping the questions short. The next question comes from the line of [ Nagraj Chandrasekar ].

Am I audible?

Yes. Go ahead.

Congratulations for what looks -- what I see, a very good acquisition. Just wanted to understand, you've been fairly candid about cyclicality in the LND industry revenue-wise in your core business. I'm wondering if management consulting firms who benefit and obviously go up and down with the, say, the U.S. economy as a whole. Would the LND spend by them even more cyclical than our base of customers as a result because they do well when their clients are doing well and spend more on consulting assignments with them. So just wondering if what happened in 2008 with St. Charles, what happens when the vest economy is weak with this company?

See, I think cyclicality or training being a discretionary expense doesn't change. It is a discretionary expense, whether it is being expanded with St. Charles or it is being expanded with NIIT. I think the interesting part, like I pointed out, with strategy and management consulting companies is that expertise and skills are at the core of what they do. If they are not skilled or they are not providing expertise, their value diminishes at a remarkably high rate. And therefore, they spend significantly more on trailing. So I would agree that the L&D business globally is cyclical. It is a discretionary expense, but by broad-basing our market segments, we will be able to not just improve our overall spread, improve the amount of another number of customers that we are able to have as well as customers who have potential to spend a lot with NIIT. But I would agree that the fact that LND is a discretionary expense would continue. The only other point I would make, which is specific to this sector is there are a couple of things that make it more robust from an L&D spend as compared to others. I would say 2 things to that. One, I have mentioned, they spend a lot more than others. The second, they -- in addition to being regulated themselves, also have to spend a lot of time and energy on regulation and regulatory training with respect to the industries that they serve. So the proportion of regulatory and, therefore, mandatory training that's there in strategy and management consulting firms is significantly higher than some of the other sectors that they serve.

The next question comes from the line of Rahul Jain.

Can you hear me?

Yes.

Yes. Sorry for that. See, I have a question that you said on the top end of year on out, they will deliver similar CLG business. However, the revenue growth in the past has been much slower. So is it led by thought that the growth should be much larger and has been a takeaway? And secondly, on the amortization, if you could give the run rate that you may see on an incremental basis.

You didn't come through clearly.

Yes. So okay, I'll repeat my question. I said in one of your comment, you said the growth rate on the top end of the earnout would be similar to our growth rate in the CLG business, but we have not seen that kind of growth in the years that you have mentioned the financials for the business. So is it led by synergetic thought or they used to grow at that pace earlier?

Let me clarify. Let me clarify. Like I pointed out, last year, they grew at 57%, which was, to some extent, aided by the pent-up demand. The stated goal for the CLG business is to grow at 20% on a year-on-year basis. From a long-term perspective, there are times when CLG has grown at a rate that is higher than that. There are times that when it has grown at a rate that's lower than that. But the long term, midterm expectation is that it grows at a 20% rate. In terms of St. Charles, in the past, they have grown at a rate that is higher than or in line with CLG's growth rate. But their maximum earnout is capped at a rate that is significantly higher than that. Did that answer your question?

Yes, yes. And the second part of the amortization.

What was the question on amortization?

Like what would be the incremental amortization charge that would come because of this integration?

How will we do the goodwill and IP accounting? Yes. So that is work in progress. I think in the end of quarter 3 results -- at quarter 3 results, you will get a clearer, but all those are below the line anyway.

We have our next question from the line of Nemish Shah.

Congratulations. So you mentioned that post this acquisition, you will have a seat on the table for the Fortune 1000 companies looking for strategic learning intervention. So Lou, does St. Charles currently have that as a segment or they are only catering to the consulting companies?

At this point in time, a very large percentage of their business upwards of 85% comes from strategy and management consulting companies. But like I pointed out, we have 70 customers, and we are adding 16 to 20 customers each year. This capability is a capability that is very interesting for our customers, and they will be able to leverage it to the hilt. And by doing that, we will be able to get a seat at the table as they are thinking of strategic training interventions.

Understood. So any -- if you have any numbers in terms of what can be the addressable market or?

Like I pointed out, we have 70 customers and all of them would have such a need. And for June, 1,000, at least, till yesterday, there were still 1,000 companies, and all of them will have such a need. Like I pointed out, talent and talent transformation are the top agenda items for CEOs given all the transformation that's going on. And we expect that this acquisition and this capability will help us help our customers address their key talent transformation issues.

The next question comes from the line of Sameer Dosani.

Can you just throw some light about the competitive intensity in this -- in which the company operates essential [indiscernible].

That's a very good question. I think if you think of our key competitors, and we've talked about them in the past, they include IBM, Accenture, Raytheon, Conduent and General Physics. And with the exception of General Physics, all others, interestingly enough, compete with the top management and strategy consulting companies. So it is our belief that the competitive intensity for the work that we do. Within the management and professional management and strategy consulting companies may actually be lower. So for example, for PwC to hire Accenture for training, would be an interesting thought.

Understood, understood. Yes. And also, can you just clarify, I think I couldn't get your statement around 7x EBITDA. I think you said something about the valuation. If you can just clarify that?

Sure. The valuation -- base valuation is based on projected '22 EBITDA, 7x of projected '22 EBITDA. Now this cap add achieving goals that are higher than the projected numbers over the next years.

Okay, okay. And just one clarification. So already, this company, St. Charles, is already working with top 12 of the top 15 consulting companies. Where do you think the growth will come from, in this company? Because competition is already low if you are already there with all the existing customers. I mean, big customers that are relevant, if you can just throw some light on that.

Sure. So first off, the here and now growth opportunity would be to grow the wallet share in each one of their customers. Again, these customers spend a lot of money on L&D and with the expanded set of services, they have a great opportunity to do more with their customers. The second area would be geographic expansion. All of their customers are global firms. But today, their operations are predominantly U.S.-based. So there is a significant opportunity for growth in other geographies where NIIT has significant strength, which include Europe and India. And a number of the strategy and management consulting firms have very significant go-forward plans for India as well as overall expansion.

The next question is a follow-on from the line of Shradha Agrawal.

Just wanted to check on the client concentration of St. Charles. I mean how much of the top clients contribute to the revenue and -- yes.

So if you look at their top 10 customers, their top 10 customers contribute about 80% percent of the overall revenue. The second thing I would say is that as you look at each one of their customers, the way their customers are organized is as different entities, and several times working quite independently. So sometimes while their revenues from a named customer get consolidated but they're actually being delivered across 4 or 5 or 6 of their entities, which were quite independently.

The next question is from the line of V.P. Rajesh, which is a follow-on question again.

If you can share the calendar year '19 and '20 revenues and EBITDA margin for this business.

Give me one second. Let me look them up.

About $15.5 million in $13.5 million.

So calendar year '19 was $15.5 million. Calendar year '20 was $13.5 million approximately.

Those are approximate.

Approximate numbers. And the margins have been in line with CLG margins of approximately 20%.

Given there are no further questions, I think I'll hand it back to the management for their closing comments. Sapnesh? I think there's one question coming. I mean, Mr. Konik, you want to ask? I just saw a hand raise up. But yes, I mean, Sapnesh, go ahead.

Okay. Thanks. Thanks, Divakar. And thanks, everyone, for joining. Your questions were very insightful. And as always, we appreciate your time and your questions. They allow us to dig deeper and think differently and appreciate you both asking questions and spending time on NIIT.

Thank you so much. In case there are any further questions, clarifications on this, you can write to the Investor Relations team at NIIT. And we'd be happy to kind of come back to you with clarifications, and we're always available to kind of give any information that you might want. Thank you so much. Have a great day, guys. Bye.

Thanks, Divakar.

Thank you.

Thank you. Bye. Thank you.