Nucleus Software Exports Limited (531209) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. I'm the moderator of this call. Thank you for standing by, and welcome to Nucleus Software Quarterly Earnings Conference Call for the quarter [Audio Gap] and year ended on 30th June 2021. [Operator Instructions] I would like to now hand over the proceedings to Ms. Swati Ahuja. Thank you, and over to you, Swati.

Thanks, Harpreet. Good afternoon, everyone. This is Swati from Investor Relations team at Nucleus Software. A very warm welcome to all of you for this Nuclear Software earning conference call for the first quarter ended as on June 30, 2021. For discussion, we have here from the management team, Mr. Vishnu R. Dusad, our Managing Director; Mr. Parag Bhise, CEO; Mr. Anurag Mantri, CFO and Executive Director; Mr. Tapan Jayaswal, to lead from the Finance team; Ms. Prema Rajaraman, Global Head of HR; and Mr. Ashish Khanna, Business Consultant Financial Inclusion. As you all are aware, Nucleus Software does not provide any specific revenue earning guidance. Anything which is said during this call, which may reflect our outlook for the future or which may be construed as a forward-looking statement must be reviewed in conjunction with risk that the company faces. An audio and transcript of this call would be shortly available on the Investor section of our website, www.nucleussoftware.com. With this, we are now ready to begin with the opening comments on the performance of the company for the quarter ended on June 30, 2021, from the MD. And post that, we would be available for the Q&A session. With this, I now pass it over to Vishnu sir. Over to you, sir.

Thanks, Swati, and a warm welcome to the investor call for the first quarter ending 30 June 2021. The first quarter this year was one of the toughest for us. As we were barely recovering from the COVID-19 second wave, as we had mentioned in our investor call on 4th of June, we were hit by a ransomware attack that almost crippled us for a couple of weeks during the month of June '21. Thanks to the phenomenon referred by our leaders and our partners. We are fully back on our feet and has emerged wiser and stronger. The other challenge that we as an industry are facing, is that of industry-wide admissions. Due to huge increase in digitization work to the country, to ensure that Nucleus continue to add value to our customers in an uninterrupted manner, we took some major steps. The compensation has been raised substantially. While this has affected our profitability, we are confident we will be able to get back to our standard of durability in not-too-distant future. We believe that this is an investment in our future. With those words, I would now like to hand over to our CEO, Parag Bhise, over to you, Parag.

Thank you very much, Vishnu for your comments. Yes, I echo Vishnu's comments. The quarter that has gone by is arguably one of the toughest quarters that I have seen in my 30-plus years of association with the company and the industry for that matter. These are hit by 3 major problems in quick succession within the same quarter. The last one of them being something in the entire industry setting, the severe resource demand scope challenge, the way we look at it. We have responded to all these 3 -- all 3 of these challenges appropriately. And while it is still not sure where that black box caused by the extreme surge in demand of trained technical people will stop, where it will stop. We are obviously closely monitoring the situation, and we'll respond to it as required. Well as profits have been impacted due to the rise in personnel cost. With the business opportunity is shaping up that are visible to us and already in your hand. We are quite confident that we'll be back on track soon. That's all from my side. Thank you.

Tapan sir, will you please highlight the financials.

Hello. Yes. Thank you, Parag sir. Okay, key highlights from financials are we have a consolidated revenue for the quarter is at INR 108.4 crores against INR 124.2 crores quarter-on-quarter and INR 128.4 crores year-on-year. Overall revenue in foreign currency, including India rupee revenue is USD 14.8 million for the quarter against USD 16.9 million quarter-on-quarter and USD 17.3 million year-on-year. Product revenue for the quarter is at INR 89.9 crores against INR 105 crores quarter-on-quarter and INR 107.1 crore year-on-year. Revenue from the project and services for the quarter is at INR 18.5 crores against INR 19.2 crores quarter-on-quarter and INR 21.3 crores year-on-year. Moving on to the expenses side of it, cost of delivery, including cost of product development for the quarter is at 81.2% of revenue against 63.6% of revenue quarter-on-quarter and 62.6% of revenue year-on-year. In absolute terms, this is INR 88.1 crores against INR 79 crores quarter-on-quarter and INR 80.3 crores year-on-year. Marketing and sales expense for the quarter is 5.7% of revenue against 3.7% of revenue quarter-on-quarter and 1.6% year-on-year. In absolute terms, this is INR 6.2 crores against INR 4.6 crores quarter-on-quarter and INR 2 crores year-on-year. Moving on to general and administration expenses for the quarter is 11.8% of revenue against 7.3% of revenue quarter-on-quarter and 6.9% year-on-year. In absolute terms, this is INR 12.8 crores against INR 9.1 crore quarter-on-quarter and INR 8.9 crores year-on-year. EBITDA for the quarter is at INR 1.4 crores against INR 31.5 crores quarter-on-quarter and INR 37.1 crores year-on-year. Other income from investment and deposit at INR 8.8 crores against INR 6.7 crores quarter-on-quarter and INR 10.7 crores year-on-year. Total other income for the quarter is INR 10.8 crore against INR 7.2 crores quarter-on-quarter and INR 13 crores year-on-year. Total taxes are at INR 3.1 crores against INR 8.2 crores quarter-on-quarter and INR 10.1 crores year-on-year. Net profit stands at INR 6 crores for the quarter against INR 27.4 crores quarter-on-quarter and INR 36.3 crores year-on-year. Other comprehensive income is at negative INR 3.2 crores for the quarter against negative INR 1.5 crores quarter-on-quarter and INR 2.4 crores year-on-year. Total comprehensive income, which includes net profit and other comprehensive income is at INR 2.8 crores for the quarter against INR 25.9 crores quarter-on-quarter and INR 38.7 crores year-on-year. EPS for the quarter is at INR 2.07 as against INR 9.42 in the previous quarter and INR 12.51 in June '20 quarter. In terms of foreign currency hedges on June 30, 2021, we had USD 5 million of forward contracts at an average rate of 75.14. There is a mark-to-market loss of INR 3.69 lakhs, which is taken to hedging reserves in the balance sheet. Revenue contribution from the top 5 clients for the quarter is 26% as against 27% in the previous quarter. The order book position stands at 534.9 crores, including 490.4 crores of product business and INR 44.5 crores of projects and services business. In March 31, 2020, the order book position was INR 477.9 crores, including 445.9 crores of product business and INR 32 crores of projects and services business. Total cash and cash equivalent as on 30 June 2021 are INR 734.3 crores against INR 692 crores as on 31st March 2021. This includes balance in current accounts of INR 35.1 crores, various schemes of mutual funds amounting to INR 528.1 crores, fixed deposits of INR 29.6 crores, investment in tax-free bonds of INR 113.2 crores, INR 28.3 crores in preference shares. With regards to receivables, we are at INR 69.5 crores against INR 85.7 crores previous quarter. During the quarter, there is a gross addition of fixed assets of INR 2.62 crores, consisting primarily of INR 0.34 crores on plant and machinery, INR 1.18 crores on software and INR 1.10 crores on computers. Now I hand over to Swati.

Thank you, sir. With this, we are now open for a Q&A session. I will now hand it over to Harpreet. Over to you, Harpreet.

[Operator Instructions] First question of today we have from [Audio Gap] from [ HMC ] Private Limited.

Yes, so I have a couple of questions. First is the -- so I'll put together, if you want. So sir, are we still seeing difficulties in NBFC sector, as you said in the last call, if you see, as of now, the most of the NBFC now stands at the pre-COVID level. And the collection efficiency also nearly stands at 90%. So we are still making difficulties, please can you give some color on it.

Yes, this is Parag here, thank you for your question. So NBFC front from a business perspective, orders, et cetera, now we are not seeing any challenges. We are -- as I indicated in my initial comments that the business perspective looks good, including NBFC. So to be specific, no, we're not now facing any challenges. We are getting the collection.

Okay. So we are not getting any difficulties right now from the NBFC.

No. Not at the moment.

Okay, and the second question, we can see there is like a huge jump on employee benefit expense which stands at 85% as a percentage of sales during the quarter, and the last quarter was 59%. So will it continue for the coming quarters, sir? We are quite actually higher than the peers on the employee expense.

So you're talking about personnel expenses, right?

Yes, yes, yes. I'm talking about the personal expenses, like implement expense.

Okay, so this quarter is exceptional because if you know our revenues are also down because of the problem that Vishnu sir talked about, we face these problems in succession. COVID has impacted them severely then followed by the ransomware because of this past few weeks we were not operational. And the huge demand because of this, the attrition has happened, which is an industry-wide phenomenon, but we are also facing it. So this quarter, we were hit by, on one side, revenue shortage, on the other side, we had to revise our salaries significantly. So there was a real impact. We don't expect the same in next quarter, at least that is what is the expectation because as I said, the business is looking good. At least the other 2 problems are behind us. And they should be probably doing much better on the revenue side, at least. That's my belief.

Okay, so we'll still maintain 64% on a yearly basis.

We're not really sure whether -- as Parag has highlighted, so this is Vishnu. As Parag highlighted, we do hope to recover from, obviously, this hopefully, the worst quarter, we will certainly recover but how much -- how long will it take for us to come back to the same ratios. We are not in a position to comment right now.

Next, we have Divyesh Mehta from Dolat Capital.

Okay, so my first question is that even when in the last quarter, you had seen some revenue decline, which was due to supply shortage factors or lower accretion from the order book. Is it the same case this time? Even if it is the same case, I think the decline in revenue is a bit steep. If you can give some clarity on that. And what is the current status in July and August? How are things going on right now. And how do we expect to again get traction from the order book? Because our order book is increasing, but your revenue is not. And can you share the quantum of the bonus on how you've given what is the the attrition percentage? That's it. If you can answer these.

Okay, as far as the attrition percentage is concerned, I think it is upwards of 30% annualized. And in fact, in 1 month, it was fairly close to 40%. However, thanks to the substantial increase that we have in the -- given, it is suddenly somewhat under control. And we are keeping a -- Parag has mentioned, we are keeping a close eye on how things are unfolding at the industry level, and we will be taking steps accordingly. So though only this is what we can say at this juncture. If there's anything else that you would like to understand, please let us know.

If you can give an idea that why the -- so why there was such a steep decline? And how are we planning to recover from this? And how would the -- again, the orders will fall into the revenue?

Right. So as far as the steep decline is concerned, as we had mentioned earlier, the COVID second wave and the ransomware attack were the 2 main reasons, along with the attrition that I have talked about. And we -- and as far as the order book is concerned, it is a combination of both immediate term, short term and long-term orders that are there. And that's how you see this increase in order book. However, part of it may or may not be executable immediately. So that is the reason for why order book is higher, partially we'll execute it. I hope so that answers your question about steep decline and the order book.

Next, we have Rahul Jain from Dolat Capital.

Vishnu, from the ransomware side, could you a little bit elaborate in terms of what was the precise impact? Is it some client side revenue recognition, which could not happen for some period? Is it some revenue reversal, or it is a loss of time which led to this impact from ransomware on revenues?

Essentially, it was a loss of time that for some of the customers, thankfully we were able to recover within days, for some customers it took us a couple of weeks. So it was essentially a loss of time where some of our teams could not work. And that is what has resulted into a drop in the revenue because of time constraints. And of course, as we mentioned earlier, other part of the -- of course, we did recover, in fact, in a timely manner from the ransomware. There's a partner who helped us out in this recovery. They have mentioned that this is one of the fastest recoveries that they have seen. So clearly we have come out, as I had mentioned, wiser and stronger. We need to be far more vigilant than we were -- and that's what now we are very closely working on to make sure that we have learned from this interest.

Sure, sure. And of course, you said how you would recover over a period of time and difficult to gauge. I can understand that part. But just simply from a pure supply side factor and ransomware side factor, which is more like a onetime kind of an impact. So is it fair to assume from a July, August run rate basis, we are at least back to our, let's say, Q4 kind of a run rate? Or it is too early to even conclude that?

Yes, it is too early to conclude even that because while we have started functioning fully by end June or first week of July, the impact that the suspension of a whatever days, weeks that happened, that we are still working out how it's going to impact the revenue for this quarter as well as the next few quarters.

Right, right. And on the attrition side, as you said, it went alarming all the way to 40% monthly run rate on an annualized basis. So is this a new hike effective month of July? And if yes, then has this helped in some curtailment of the attrition in the July data so far?

Certainly, this hike is effective April '21. However, because of the issues that we were facing the communication was done in the month of July. And yes, we do feel like that the worst is behind us even on this side.

Okay, so you are essentially trying to say that although the salary was revised up from April, the -- for first quarter, the increments were rolled out -- the arrears were rolled out in the month of July from a cash flow point of view.

It was not cash flow point of view. It was -- cash flow was not an issue. The entire process that...

Yes, I understand. So people who received this money for increased salary was paid eventually in July. So people didn't receive that increased salary in April, May, June, as those months happen because that communication itself happened in July, although it is effective from April.

You got it absolutely right.

Okay, okay, okay. So that's why even any benefit from an attrition point of view could have -- the decision-making could have helped only in July, not earlier, right, because they were not aware of this hike.

You got it absolutely right.

Right. So that way -- so again, moving back to my original question, which is like, has July attrition cooled off to a normalized level or the market is still hot, and that's why it will take some more time for us to normalize?

Okay. Let me put it this way, market, it used to be hard. We are keeping a very, very, very close eye on how things are unfolding. As of now, we see the worst period is behind us. But we will let you know when we connect in the month of October or early month or even in the next move...

Right, and sorry, if I can squeeze one more. Just last question. Have we done any kind of analysis in terms of who we are losing this talent to or is it going to start up ecosystem was more going toward IT services, which is again hiring big time. Given the nature of the talent we may have, it could be a little more specialized on the product side. So where we are losing these people whom -- and which kind of company we're losing to these people?

Prema, would you like to take this?

Sure, sir. Thank you. So there are vary kind of companies. There is no specific place that I can name. The multiple of them that are midsize and also the big size that people are going to. And of course, the compensation is the major factor for which people end up leaving. And it's start-up as soon as the big size that people are going to.

Next, we have Himanshu from PGIM.

I have 2, 3 very basic questions related to the business. See, in one of the calls, we stated that existing product has a huge opportunity and we have only done a very small portion of it, okay. And the steps we said that we need to expand geographically. And in few markets we have 1 or 2 customers only, hence, we need to gain market share in those markets, okay. Generally, in this business, what leads the customer to change its vendor or add a new service line, okay? What is your strategy besides the good product to gain market share in these geographies? And what progress have we made in this -- in last 1 year because I think this was stated in Q1 FY '21.

Yes. Thanks for the question. I think right through the year that has gone by, we have been reaching out to our prospective customers through various web conferences. And thanks to that, there is adequate amount of intro, of inquiries for our solutions. And what is happening is while the intro is adequate -- intro of inquiries is adequate, the decision-making cycle is slightly longer. We do have some orders coming in, but we don't see them at the pace that we would like to. We -- but at the same time, we're confident that I think as it starts settling, we would be able to see upsurge in the orders coming out of it.

See, my question was, so this is what you are No. See, my question was -- so this what you're seeing, but my question was on our strategy, okay, to gain market share and what leads the customer to add, change its vendor or, let's say, add a new product to its system, okay. So in many of the markets where you stated that we have only 1 or 2 customers. Hence, the focus has to be to gain market share in those geographies. So just on those aspects, if you can elaborate, I wanted to -- my question is to understand the business, okay, not the...

Okay. The way I would answer this part of the question is with our implementations, wherever, whichever markets we have, we are demonstating the value that is getting delivered to the prospective customers from the existing customers that we have in those geographies. And then we encourage them to look at a line of business getting -- starting to use our solution. And once they are able to see -- once that goes live, they are able to see the value. And over a period, then we visualize that other lines of businesses, they would be able to see the value in our products. For example, buy now pay later is a functionality. Or is the need that is rising in a substantial way and there are adequate number of queries on that part of the functionality, which we are talking to at least maybe 5 to 10 customers. Now once these customers who want to start offering buy-now-pay-later functionality product to their to prospective customers, they see how easily they can offer that to their customers, we're confident that they would use our product for the automobile offering, their mortgage offering and so on. That's the way we are approaching this situation. Himanshu, I hope I have answered your question now.

Yes. Can I ask 2 more questions just for...

Definitely. Please do go ahead.

Yes. We expect that we have 3 modes of business growth, okay? One is product, the second was uptrading and third was service business from Chennai and Singapore, where we do customized products if we look at that service business. How is this business at service is still doing in terms of growth? Because what we understand with the digitization and so many things improving and we being more specialized, are we getting higher traction? Or do you think that business can also have a higher growth? Or what's your -- what are you seeing in that business?

I would request my colleague, Anurag Mantri, who looks after this business as well apart from his CFO hat to answer this question.

Hi, this is Anurag. Thanks for your question, and you are absolutely right that in these days, services dimension is actually -- is gaining a lot of traction. And we are also leveraging on the same. We are expanding our digital services offerings in services business. And in recent times, we have received some very good traction from Southeast Asia market as well as Middle East. And we are seeing some -- we are expecting some significant increase in services business around the digital transformation offerings. I hope this answers your question.

Yes. But are the margins also improving in such businesses where the customized solutions are there? And are you able to differentiate being because of its financial dominance?

Definitely. Yes, so the way I will like to answer is that the margins are not that great in the traditional IT services business. In last 2 years, we have predominantly moved towards the transformative services business. And there, we are taking a unique blend of our functional and domain knowledge, as well as technical expertise to our customers. And that is helping us to demand the premium or higher margins.

And my last question, as investors, our understanding in the product business is it's a steady business in cash flow terms. Our revenue line will be more volatile. But once customer is logged in, it will remain with the company for a long period of time. I mean incremental costs are low, okay, for getting the -- selling the product, okay. Hence, such companies will pay good dividend, okay? So we see Oracle, or let's say, Australia [ Kale ] and all these companies where dividend would be more than 50%, 60% of the profit. Why and what risk does the Board see and we as investors are not able to see. Can you elaborate on the -- because I think there is a lot of questions historically has been asked. And -- but as investors, we come with such a mindset because we look at other product companies in such domains behaving in this way, and this company behaves in a different way, I think the difference is the way you see risk. And we are not able to comprehend. So can you elaborate on 3, 4 minutes on the risk which Board and management is able to see and we, investors, are not able to see in the business?

Okay, let me attempt answering it this way, that we are scheduled to have a Board meeting essentially on this single topic alone in near future. And when we connect next quarter, we'll be able to give you a comprehensive perspective on how the Board is looking at this. As you have very correctly said, it's a longest standing question.

One thing just elaborating or just -- so do you think that risk we are seeing or do you think we have a -- as investors, we have some decent understanding, but it is just a conservativeness of management, the risks are able to understand the investors or do you think there's gap just between our understanding of risk itself? So the way management and Board thinks, and we investor can be very different.

Fair enough. And that's what I would just like to repeat that Board is meeting essentially to discuss these issues in near future. And then when we connect next quarter to update you about the current quarter in the month of October or early November, that is the time we'll bring you out the cards.

Next, we have Deepan Shankar from Trustline [ Chambers ]

Firstly, I would like to understand outlook on our business, specifically on export side. So how is the outlook looking under the current business environment?