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

Good afternoon, ladies and gentlemen. Thank you for standing by. I'm Ritika, moderator for the conference call. Welcome to Nucleus Software Quarterly Earnings Conference Call for the quarter and half year ended on 30th September 2022. [Operator Instructions] Please note, this conference is recorded. I would now like to hand over the floor to Ms. Swati Ahuja. Thank you, and over to you, Swati.

Thanks, Ritika. Good afternoon, everyone. This is Swati from Investor Relations team at Nucleus Software. I wish to all of you for this Nucleus Software Earnings Conference Call for the quarter and the half year ended on September 30, 2022. For discussion, we have here from the management team, Mr. Vishnu R. Dusad, our Managing Director; Mr. Parag Bhise, CEO and Executive Director; Mr. Anurag Mantri, CFO and Executive Director; Mr. Ritika Dusad, Executive Director and Chief Innovative Officer; Mr. Brajesh Khandelwal, Vice President, Neo Business; Mr. Ashwani Arora, Senior Vice President, Global Customer Success Team; Mr. Ashish Khanna, Business Head, Financial Inclusion; Mr. Tapan Jayaswal, Financial Controller. As you all are aware, Nucleus Software does not provide any specific revenue or 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 the risks that the company faces. An audio and transcript of this call would be shortly available on the Investors 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 and half year ended September 30, 2022. And post that, we would be available for the question-answer session. With this, I now pass over to Vishnu, sir. Over to you, sir.

Thanks a lot, Swati, and warm welcome to all of you for this special quarterly earnings call. It is special because this quarter, we have completed 30 years of creating intellectual property on Indian soil. This is an extremely important aspect for us because 30 years back when India was getting into software business, India as a country, we were not -- our provisions are not described in very glowing terms. So we feel that we need to do something about this. And that is how we thought that we must get intellectual property on this very soil. And we are glad to let you know that we have completed 30 years this quarter of that achievement. Over these 3 decades, we have been able to create absolutely world-class intellectual property that has helped India to make strides in retail lending. Today, we are looking at retail assets in the banking industry worth INR 80 lakh crores. This number would not have been possible without a robust -- product robust intellectual property, which would ensure that the loans are given to the right people, the repayments are tracked properly and in case of default, collections are made in a meaningful manner. It is only this rigorous discipline, which has enabled the retail lending industry, which was almost nonexistent 30 years back, to take such a sizable shape of having INR 80 lakh crores of retail assets. We are absolutely delighted that we play equally important role in the transaction banking space. We are processing today INR 6 crore to INR 8 crore transactions per month on our platform, FinnAxia. We remain confident that there are sustained focus on delivering value to our customers, they will continue to lead the back in their respective domains, and they will be able to deliver value to their end customers. With these words, I would now like to invite my colleague, Parag Bhise, to take the conference forward.

Thank you so much, Vishnu, sir, for your address and for guiding us and inspiring us for all these years. Good afternoon, everyone, and welcome you all to this investor call. It is indeed a moment of great pride for all of us. And I guess it would be for all of you as well that your company is completing 30 years in the software IP business. It has been 30 years since the visionary leadership of this organization led us to have our first product from Nucleus Software that came out from Indian soil in this domain. I would like to congratulate you all as well on achieving this milestone. As regards this quarter, this has been an interesting quarter for us, yet another interesting one. Attrition is thankfully showing a downward trend, and indications are that now, it may settle down here, thanks to both, I think, the significant steps that we have taken in terms of salary revisions that I've been talking about as well as market dynamics easing out probably due to the global economic indicators. We still need to, however, keep a close watch on this very important aspect. We have made slow but very significant progress on the AMC revision front that also we've been talking about, with one more large customer agreeing to and signing up for a significant rate revision on the AMC front, in addition to a couple of them that have already signed earlier, about whom we had updated you earlier. There are a few more customers and large ones at that, whom we are pursuing very aggressively to close in Q3 and Q4, and the impact of these revisions would be visible in the financials of next 2 quarters. The AMC journey is a complicated one and time-consuming one, as with each of our customers and especially considering that we are looking at very significant revisions as compared to the ultra-deep discounted pricing that we have been doing all these years, and our customers are not used to such requests coming from our side. But once we are able to communicate the value being delivered to them in numbers terms, in most cases, we find an in principle alignment. We also spoken about improving our project management capacity and capability in the past for ensuring smoother executions, and I'm pleased to inform you that we are taking specific steps to improve this situation. And the key initiatives are: one, intense project management trainings from industry experts that are personally being supervised and monitored by Anurag, my colleague, who you'll hear in some time during the Q&A. Also, hiring from premium institutes, MBA institutes, some industry experts from other industry who come to us with experience. This is an experience -- experiment that we are trying out and we are really getting some encouraging response already. We've also taken multiple initiatives for enhancing our branding and our visibility, with Nucleus participating in leading fintech events in Philippines, Dubai, including just last week in the Singapore FinTech Festival and in Australia, simultaneously. We have garnered great response from these events, and we are confident that these events will help us amplify and enhance our market image. Thank you so much, and welcome you all once more. Over to you, Swati.

Thank you, sir. Now I invite Tapan sir, to put some light on financial numbers.

Hello, Swati. Am I audible?

Yes, sir. you're audible. Yes.

Yes. Awesome. Highlights from financial are: as for revenue, our consolidated revenue for the quarter is at INR 130.1 crores against INR 128.8 crore quarter-on-quarter and INR 114.1 crore year-on-year. Overall revenue in foreign currency, including India rupee revenue, USD 16.6 million for the quarter against USD [ 17 million ] quarter-on-quarter and USD 15.5 million year-on-year. Product revenue for the quarter is at INR 106.2 crore against INR 108.0 crore quarter-on-quarter and INR 93.2 crore year-on-year. Revenue from projects and services for the quarter is at INR 23.9 crore against INR 20.8 crore quarter-on-quarter and INR 20.9 crore year-on-year. As for expenses, cost of delivery, including cost of product development for the quarter is 76.5% of revenue against 75.6% of revenue quarter-on-quarter and 81.5% of revenue year-on-year. In absolute terms, this is INR 99.5 crore against INR 97.4 crore quarter-on-quarter and INR 93 crore year-on-year. Marketing and sales expenses for the quarter is 4.3% of revenue against 3.3% of revenue quarter-on-quarter and 3.6% year-on-year. In absolute terms, this is INR 5.7 crore against INR 4.2 crore quarter-on-quarter and INR 4.1 crore year-on-year. G&A expenses for the quarter is 10.6% of revenue against 9.9% of revenue quarter-on-quarter and -- sorry, and 10.8% year-on-year. In absolute terms, this is INR 13.7 crore against INR 12.7 crore quarter-on-quarter and INR 12.4 crore year-on-year. EBITDA for the quarter is at INR 11.2 crore, that was 8.6% of revenue against INR 14.5 crore, that is 11.3% of revenue quarter-on-quarter and INR 4.7 crore, which is 4.1% of revenue year-on-year. Other income from investments and deposits at INR 6.9 crore against INR 3.9 crore quarter-on-quarter and INR 8.4 crore year-on-year. Total other income for the quarter is INR 8.8 crore against INR 6.2 crore quarter-on-quarter and INR 9.5 crore year-on-year. Total taxes are at INR 3.9 crores against INR 4.7 crore quarter-on-quarter and INR 2.4 crores year-on-year. Net profit is at INR 11 crores for the quarter against INR 10.8 crores for quarter and INR 8.6 crores year-on-year. Other comprehensive income is INR 1.6 crores for the quarter against INR 0.02 crores quarter-on-quarter and negative INR 1.5 crore year-on-year. Total comprehensive income, which includes net profit and other comprehensive income is at INR 12.6 crore for the quarter against INR 11 crore quarter-on-quarter and INR 7.1 crore year-on-year. EPS for the quarter is at INR 4.12 as against INR 4.02 in the previous quarter and INR 2.95 in September 30, 2021, quarter. In terms of foreign currencies hedges from September 30, 2022, we had USD 3.45 million of power contracts at an average rate of INR 80.05. There is a mark-to-market loss of INR 72 lakhs, which is taken to hedging reserve and the balance sheet. Revenue contribution from the top 5 clients for the quarter is 28.5% against 26.2% in the previous quarter. The order book position is INR 572.9 crore, including INR 538.9 crore of product business and INR 34 crore of projects and services business. In June 30, 2022, the order book position was INR 562.5 crores, including INR 527.7 crore of products business and INR 34.8 crores of project and services business. As for total cash and cash equivalents as on 30th September 2022, it's INR 558 crores against INR 551.1 crore as on 30th June 2022. This includes balances in current accounts of INR 33.6 crore, various schemes for mutual funds, INR 409.6 crore, fixed deposit of INR 30.8 crore, investment in tax-free bonds of INR 78.8 crore, INR 5.2 crore in preference share. With regards to receivables, we are at INR 72.5 crore against INR 68.2 crore in this quarter. During the quarter, there is a gross addition of fixed assets of INR 0.73 crores, consisting primarily of [indiscernible] on software, INR 0.16 crore on vehicle, INR 0.09 crore on plant and machinery and INR 0.04 crore on computers. I'll hand over it to Swati.

Thank you, sir. With this, we are now ready to open our question-and-answer session. I will now hand over to Ritika. Over to you, Ritika.

[Operator Instructions] First question comes from Vaibhav from Honesty and Integrity Investment.

So last quarter, we talked about some of the AMC revenue, which we have not recognized. So is it -- has it come during the quarter or not yet. Does those contracts are still under negotiation?

Thanks, Vaibhav, for raising this question. As I mentioned in my opening remarks, yes, one customer has got converted, but though it happened after the quarter end. So real impact is not visible in this quarter's financials, but you'll see that in the quarters coming in. And as I said, there are advance and very positive interactions happening with at least 4, 5 other customers, which we will expect to close in this financial year.

Okay. Okay. Understand. And lastly, the number of employees that we have at quarter end, if you can provide that number?

Parag, I'll take that. Anurag this side. Thanks, Vaibhav, for asking this. Our employee strength stands at 1,695, which is a decrease from the previous quarter. But one thing which is very, very encouraging, as mentioned by Parag also that our attrition in this quarter had been lowest among multiple, multiple quarters. And this attrition is also not of the experienced professionals but the youngsters, the young minds. So that's very, very -- we would like to arrange this also, but that's a very, very encouraging reversal what we are observing now.

[Operator Instructions] We are having a question from Deepan Shankar from Trustline PMS.

So firstly, wanted to understand, so what proportion of our old customers who have been already moved to new pricing norms, so just wanted to check that?

Percentage terms -- but as I said, we had already talked about 2 large customers already earlier in the past investor calls and one more large customers already. So 3 in total. And as I also mentioned, I'll repeat that at least 4, 5 in this financial year more we are expecting.

Okay. So when do we expect that this kind of incremental revenues to flow in our revenues?

Q3 and Q4.

[Operator Instructions] We are having a question from Samarth Singh from TPF.

I was drop from the call. I just made some clarification on this booking on this AMC revenue. So in quarter 1, I would like to believe that we are not really booked any of the AMC revenue, then it was deferred. So can you just clarify was any AMC revenue booked in Q1? Or because you mentioned, I think, 2 clients are already moved. How do you agreed to revise pricing?

Yes. Yes. In Q1, we did book that.

Okay. So is the -- can you give us what is the delta in terms of how much of the revenue has not been booked so far?

Giving delta would be difficult. But as I said, let's see the impact in our next quarter and the next 2 quarters.

Okay. And can you share for the domestic revenue, what percentage of it comes from PSU in clients?

From? Sorry, can you please -- it was not very clear, can you please repeat?

What percentage of revenue comes from public sector bank?

Very minimal. We -- you would know from our client list that we are not so much into public sector. So it will be minimal.

Okay. And one last question. Even we heard about increased competition from one of the large global CRM players in this space, would you like to comment on that? And they're coming in at very low price range. Is that -- is my understanding correct? I mean will you like to talk about that a little bit more?

So 2 parts to it. There's -- as regards competition, yes, especially in the origination part, we are facing that competition that's definite, and we are taking steps to counter that. You mentioned about pricing at a very low pricing. That is not our understanding. I don't think they are coming in. As for our inputs, those information is not so easily available, but very low pricing is not our understanding for sure.

[Operator Instructions] We are having a question from Rahul Jain from Dolat Capital.

Just [indiscernible] a question on the order book number, part of voice was not very clear. If you could repeat that number?

Sorry, Rahul. There was some disturbance. We are not able to hear you clearly. You'll have to repeat the question.

Is it any better?

Yes, it is better.

Yes. Sorry. I was trying to understand the order book data that you have shared earlier. Could you repeat that? I was not able to follow that.

Tapan?

Yes, sir. The order book position is INR 572.9 crore, including INR 538.9 crore of product revenue and INR 34 crore of project and services revenue. In June 30, 2022, the order book position was INR 562.5 crores, including INR 527.7 crore of product revenue and INR 34.8 crore of project and services revenue.

Right. Secondly, on the -- this qualitative thoughts that we have shared in terms of the initiatives taken on the talent induction from campuses and the industry experts and also on the fintech participation across markets. So if you could share in terms of what are the initial positives that have come out of these initiatives? Or you would say that these are too early for us to figure it out, the outcome of those?

So on the talent front, definitely, there are positive. Because this exercise, we had started last year, as I had been updating that we had inducted 400-plus freshers from colleges. After training, a large number of those are already on our floors being part of the project teams, and they are contributing to the revenue. As regards to the other initiatives of project management training capacity building and participation in various events. Those have started lately impact of that would come in, in later quarters, probably next year. But yes, the impact of the talent -- the fresh talent that we had inducted last year is already visible.

And any benefit agreeing from this collaborating with the industry expert and FinTech conference participations?

Sorry, just to clarify, the update on industry experts was that we are taking help from industry experts to build project management capacity capability in the organization. So it's essentially training and sharing of their knowledge. So it is that kind of collaboration. And FinTech festivals, we're participating there. So our visibility is increasing. A direct positive impact of that, I think, will take some time. But for sure, our visibility is increasing that we can experience.

Right. And regarding this AMC revision exercise, you have quantified that cumulatively in this year, we will be pitching it and potentially converting 5 to 7 customers on the revised pricing. How we plan to roll out to a much larger unipole that we have? Will most of them will see this in the coming year? Or this is [indiscernible] ways limited to select few customers, and that's why the exercise would not be very large in current quarters?

Okay. So discussions are happening with much larger number of customers. So ultimately, our attempt would be to do it for everyone. Why I said 5 to 7 is, of course, because that's what -- we are looking at positively converting in this year. And I had also said in my opening remarks, the revisions are significant in scale. With each customer, there is significant time investment that we have to do, the kind of preparations, the number of meetings, et cetera. So it's slow progress, but it is definite progress.

Okay. So -- but maybe for value over 2 to 3 years, this could be rolled out to the entire client endeavors?

Yes. I don't think we'll go to the third year. I think max than 2 years we'll need to get this done.

Sure. And just lastly, any thoughts on how the demand in the market is shaping up across 3 or 4 key markets as we operate in? That how it is changing both from an opening up kind of a perspective and secondly, from the volatile macroeconomic situation?

But demand continues to be there. We are getting good traction from the market. That's what has been also updating in the past. The volatility in the global markets, yes, as of now, there is no impact that we'll see.

So if you look at this current quarterly performance also and looking at our order book situation, is there any specific reason why we were not able to and have some traction in this quarter?

Okay. If you're referring to this in revenue terms, yes, because that's why I specifically talked about that one conversion, which happened after the quarter closure. So it's just a matter of timing, I would say and nothing else.

Right. And just last question. What percentage of our revenue could be dollar invoiced and 2 or 3 major currencies that we are invoicing into other than rupee, if you could share that?

My understanding is in the range of [ 60 ] but maybe, Tapan, you can give some precise inputs. Tapan, Anurag, do you want to comment on that?

Hello?

Yes, Tapan.

Parag, sir. Could you repeat the question?

I think the question was that what percentage of revenue is in dollar terms, if I understood it?

And other foreign currencies.

And other major foreign currencies. I'll revert it down shortly in few minutes.

Sure, sure. Those were my questions.

[Operator Instructions] We're having a follow-up question from Samarth Singh from TPF.

I think on a couple of calls ago, you had mentioned the 2 main drivers that we are focusing on for this year. One was basically getting this AMC revision through, and I think we are seeing traction on that. And the second one was on conversion, converting clients from FinnOne to FinnOne Neo. Could you talk about the stats of the secondary driver, please?

Yes, yes. Thanks for raising that. Yes, we did talk about those 2 key initiatives. And while we have talked about the AMC revisions already, on the second front, also, the conversions have started to happen, I would say. So there are implementations which have started in at least in 4 accounts already, and they are more in the pipeline.

And sir, when our client moves from FinnOne to FinnOne Neo, what is the effect on the P&L?

P&L. So in fact, of course, we expect a positive impact, but precise, I don't think more than that we having for it at the moment.

The way you may want to look at it is in FinnOne, we had multiple versions. In FinnOne Neo, all our customers are going to be on a single version. So that is going to make a huge difference on how we support that single vision. So we will be saving some costs on the support front. And customers will be having a very -- even more robust platform.

So sir, sort of pulling on that side a little bit, I imagine your large customers are pretty used to your -- their customized FinnOne that they have. So how easy has it been or I mean, we've launched FinnOne Neo for a while. Are they converting? I mean what are the struggles you are facing in being able to convert them to FinnOne Neo?

Yes. So you raised a very valid point. That is a challenge definitely we see. And it takes time for us to convince them, especially with large customers. At some stages, we have to build some additional capacity in the -- we talked earlier about -- earlier that we have outside our core product where some reporting capability or some complementary functionalities can be built in. So it's a combination of both this and convincing the customer, showing them the value of the new product that has come in, both technologically and functionally advanced and the benefits that they would derive because of upgrades. So all those discussions happen. Yes, if it is challenging, it takes time. It is easier with smaller customers, no doubt about it. But you raise a very valid point.

And apart from what Parag has said on convincing the big customers, I think when they are able to see the value through the large number of APIs that would be available, the movement they go live on our FinnOne Neo platform, the speed with which they will be able to integrate with Fintechs and other solutions and in some manner, reduction in hardware and also, reduction in license cost for the database, et cetera, et cetera, benefits. The customers are now looking at it in a manner that they want to -- they would rather leverage the 100 additional benefits and if required, let go of the additional 5 benefits or 10 benefits that are accruing to them because of their own customizations.

Right, sir. So sir, out of the our top 10 customers, how many are on FinnOne Neo?

Sorry, I think the question was not very clear.

Out of our top 10 customer, how many are on FinnOne Neo?

At least 2 or 3. One of them partially because these implementations are very large. So the customers also go line of business by line of business. So there are couple of customers who are partially converted, a couple of large customers fully converted.

Okay. So is it fair to say that assuming we can go from a couple to the top 10 customers being on FinnOne Neo, we should see a reduction in our cost?

No, I'm not very clear on the question. What are you implying?

Vishnu sir was saying that FinnOne Neo is one product for all customers. So the cost of maintaining that would be lower than maintaining different customizations for every customer, as we currently do in FinnOne. So my question is, once our top 10 -- assuming our top 10 customers can get on to FinnOne Neo, would that reduce -- would that result in significant cost savings for us?

If I guess that's a fair statement. Once they are all converted, that will be significant.

And last question from my side. In the 2 geographies Far East and Southeast Asia, at one point were contributing anywhere [indiscernible] of EBIT to the bottom line. And as of today, they're still in losses. So what is happening there? And how will we proceed in these 2 geographies?

So I will take that. So as I, in fact, indicated in the last quarter also that in both these places, in both these geographies, we had good -- or we had and we are having good business pipeline, very strong pipeline. But our capacity to execute that pipeline was impacted because of immigration controls. Those controls have been lifted and the things have come to normal you see now. So Far East is very close to, again, being in black, and the same will happen for Southeast Asia as well. So -- and during this time, when we were constrained as well, the customer delight was insured, which is now going to help us in rebounding the things quickly. So next quarter should be absolutely fine for these 2 geographies in comparison to the current one.

Okay. So essentially what you are saying is, the revenues are there, it's just that we will not be able to execute it because the travel restrictions have not been -- had not been lifted, but now that is sort of taken care of.

So I will say order pipeline is there, but that might not be concluded or excluded, yes.

[Operator Instructions]

Bhise, sir, to answer on the last question, right, on the major currency part. So we are having 3 currencies majorly, USD, Singapore dollar and INR where major revenues come in.

The question was on the proportion, I guess.

Yes. So bigger portion is coming from U.S. dollars, Singapore dollar and INR. That is the majority.

Do you have a percentage figures rough, rough percentage? That was the question, I think.

So it will be close to 89%, 90% is coming from the 3 major currencies. Parag, sir, am I audible?

Yes, yes you're audible. I was just wondering if there is any follow-up questions.

There are no further questions. Now I hand over the floor to Ms. Swati Ahuja for closing comments. Over to you, ma'am.

Thank you, Ritika. Thank you so much, Ritika. Now we would like to thank all the investors for joining us today for this call. I would now hand it over Vishnu, sir, for his closing comments. Over to you, sir.

I'd like to take this opportunity to thank you all for your continued interest in Nucleus Software. And I would like to reiterate our commitment to build a long-term value-adding entity in the corporate world. Thank you so much for joining us this afternoon. Bye.

Thank you, sir. Ladies and gentlemen, this concludes your conference for today. Thank you for your participation and for using [indiscernible] Conference Call service. You may disconnect your lines now. Thank you, and have a pleasant evening.