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

Good day, ladies and gentlemen. I'm Pelcia, the moderator of this call. Thank you for standing by, and welcome to Nucleus Software Quarterly Earnings Conference Call. [Operator Instructions] I would like to now hand over the conference to Swati Ahuja. Over to you, Swati.

Thanks, Pelcia. Good afternoon, everyone. This is Swati from Investor Relations team at Nucleus Software. A very warm welcome to all of you for this Nucleus Software Earnings Conference Call for the quarter and half year ended on September 30, 2023. 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, COO, CFO and Executive Director; Dr. Ritika Dusad, Executive Director and Chief Innovative Officer; Mr. Tapan Jayaswal, Financial Controller. As you all are aware that 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 the risk 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 the opening comments on the performance of the company. And post that, we would be available for a question-and-answer session. Now I hand over to Vishnu sir. Over to you, sir.

Thanks Swati. And a very warm welcome to all of you for joining this conference call. As always, we've had a very meaningful quarter that we finished on 30th of September. And we look forward to your continued support. With these words, I will hand over to Parag.

Thank you very much, Vishnu sir. Good afternoon, everyone. I'm Parag and I welcome you all to this investor call for the quarter 2 of this financial year. As mentioned by Vishnu sir, this quarter has grown as per our expectations in terms of financials. On the other hand, we continue to work continuously on the improvement that we have been talking about and working on, on various fronts, including on processes, engineering and project management side, so that we can focus more and more on delivering value to our customers at a much faster pace, banking on the exhaustive and robust IP that we have created over the past decades. Thank you so much, and welcome you all once more.

Tapan sir, please put some light on financial number. Over to you, Tapan sir.

Hello. Good afternoon, everyone. Our key highlights from financials are -- hello, am I audible?

Yes, you're audible. Please go ahead.

Consolidated revenue for the quarter is at INR 205.3 crores against INR 206.8 crore quarter-on-quarter and INR 130.1 crore year-on-year. Overall revenue in foreign currency, including Indian rupees revenue is USD 24.9 million for the quarter against USD 25.3 million quarter-on-quarter, USD 16.6 million year-on-year. Product revenue for the quarter is at INR 174.1 crore, INR 82.6 crore quarter-on-quarter and INR 106.2 crore year-on-year. Revenue from project and services for the quarter is at INR [indiscernible] crore, INR 24.2 crore quarter-on-quarter and INR 23.9 crore year-on-year. As for expenses, cost of delivery, including cost of product development for the quarter is at 61.6% of revenue against [indiscernible] of revenue quarter-on-quarter, 76.5% of revenue year-on-year. In absolute terms, this is INR 126.3 crore against INR 125.1 crore quarter-on-quarter and INR 99.5 crore year-on-year. Marketing and sales expenses for the quarter, 5% of revenue [indiscernible] of revenue quarter-on-quarter and 4.3% year-on-year. In absolute terms, this is INR 10.4 crore against INR 7 crore quarter-on-quarter, INR [indiscernible] crore year-on-year. [indiscernible] for the quarter is at 8.2% of revenue, [indiscernible] of revenue quarter-on-quarter and 10.6% year-on-year. Absolute terms, this is INR 16.9 crore against INR 12.3 crore quarter-on-quarter, [indiscernible] crore year-on-year. EBITDA for the quarter is at INR 51.68 crore against INR 62.3 crores quarter-on-quarter, INR 11.16 crore year-on-year. Other income from investment and deposit is at INR 11.1 crores, against 11.2 crore quarter-on-quarter, [indiscernible] year-on-year. Total other income for the quarter is at INR 11.9 crore against INR 12.8 crore quarter-on-quarter and [indiscernible] year-on-year. Total taxes are at INR 15.34 crores against INR 17.97 crore quarter-on-quarter, [indiscernible] crore year-on-year. Net profit is at INR 44.6 crores for the quarter against INR 53.6 crores [indiscernible] INR 11 crores year-on-year. Other comprehensive income is at INR 3.4 crores for the quarter [indiscernible] crore quarter-on-quarter and INR 1.6 year-on-year. Total comprehensive income, which includes net profit and other comprehensive income is at INR 48 crore for the quarter against INR 56.6 crore quarter-on-quarter and INR 12.6 crore year-on-year. [indiscernible] for the quarter is at INR 16.65 as against INR 20 quarter-on-quarter and INR 4.12 year-on-year. In terms of foreign currency hedges on September 30, 2023, we had USD 3.75 million of forward contracts at an average rate of 83.10. There is a mark-to-market loss of INR 0.014 crore, which is taken to hedging reserve in the balance sheet. Revenue contribution from the top 5 clients for the quarter is the 28.8%, [indiscernible] in the previous quarter. Order book position is at INR 705.1 crore, [indiscernible] crore of product business and INR 56.9 crore of project and services business. [indiscernible] 2023, order book position was INR 758.6 crores, including INR 689.1 crore of product business and INR 69.5 crore of project and services business. Total cash and cash equivalent as on September 30, 2023, are the INR 718.1 crore against INR 701.5 crore as on [indiscernible] 2023. Balances in current accounts of INR 65 crores, [indiscernible] INR 558.7, fixed deposit of INR 27.2 crores, investment in tax-free bonds of INR 62 crores and INR 5.2 crores in preference shares. With regards to receivables, we are at INR 161.7 crore, [indiscernible] INR 200 crores in the previous quarter. During the quarter, there is a gross addition of fixed assets of INR 0.83 crores, primarily of [indiscernible] crores on computer and INR 0.13 crores on software. And we hand it over to Swati.

Thank you, sir. With this, now we are open for question-and-answer session. So I will hand over to Pelcia. Over to you, Pelcia.

[Operator Instructions] First question comes from Jiten Parmar from Aurum Capital.

Yes. Congratulations on set of numbers. My question is, why are the margins lower quarter-on-quarter and the employee costs higher? Can you throw some light on that?

Yes. Thanks for the question. We continue to invest on increasing our capacity and in terms of top line, I think we are expecting slightly higher top line, and that's how we are been hoping to maintain the margin. But without costing about quarter-to-quarter numbers, we continue to focus on building a long-term value proposition for our customers.

Sir, last time, you mentioned 30% of the contracts have moved to the newer prices. What is the percentage now at the end of this quarter?

Okay. Again, we will not be able to give you precise numbers, but most of our domestic contracts have moved to the revised AMC and our overseas contracts are in the process of moving into new pricing.

Okay. And we have a cash of around INR 700 crore plus. What is the plan for that because those -- eventually this much cash will bring our ratios down. So what is the plan for that?

Yes. Thanks for asking this question. We will not be investing in any acquisitions in any near future. And as far as paying it back to investors via dividend or buyback, et cetera, that is something that the Board will decide.

Okay. Okay. And what is the general business environment? Are you seeing any slowdown in the markets you operate in? Or things are looking up? That's my final question.

Okay. As of now, we are not experiencing any slowdown. We continue to get queries for our offering. And we are quite optimistic about the future at this point of time.

Next question comes from [ Ankush Agarwal from DPR ].

So Vishnu sir, last year, when we started with the repricing, we made this statement that at the start of the year, we were targeting for 10 number of clients. And for them, we didn't renewed AMC because we wanted to take it on higher pricing. So for this year, have we done similar kind of exercise wherein for certain clients we have not bought AMCs initially and once they close, then that retrospective impact might come in the later half of the year?

No. We have not done that this year.

Okay. Sir secondly, you stated that most of the domestic contracts have moved to new pricing and now we are focusing on the overseas markets. So my question over there is in the domestic market, Nucleus has a very good market share and some very strong market standing as far as I think we were able to get the repricing, but how easy or how difficult would it be for us to do the same for the overseas customers, if you can share some thoughts on that.

The offering -- the product offerings that we have are so strong and our prices even in the overseas markets have been equally on the lower side, so we are quite optimistic about the overseas market as well.

Okay. Okay. So do you still believe by FY '25, I think you had stated that it will take you about 2 years max to do the entire repricing. So do you still stick by that time line?

Yes. By and large, yes, some -- few customers may spill over by a couple of more quarters, that's all. But otherwise, yes, by and large, we should be able to -- we will be able to begin with the repricing with all our customers.

And lastly, sir, on the cost base. So I think last 2 quarters, the cost base has continued to increase. You have said that you have created a bench strength. So wanted to understand the thought process over here, like is this increase in bench size an outcome of the new kind of revenue base that we have seen? And then so you feel that now you have an extra margin that you can use to invest more? Or is it a response to the underlying traction that you might be seeing? And how should we look at the cost base for the remaining part of the year, if you can highlight.

Yes. Thanks for this specific question. And using the industry terminology of bench strength, which incidentally, we do not need that. Our business model does not need any bench strength as such because anyone who joins after the initial few weeks or few months of training is essentially working on a live project or is contributing to development of a product. Now that being the case, there is no bench as such. Now talking about increasing the compensation, we are absolutely confident about -- and optimistic about our future quarters and months. So we will continue to build strength from this number. We are talking about increasing the strength by 300 people at least over the year. And that should be your perspective.

Your next question comes from Gaurav Khanna from CapGrow Capital.

Would this margin be sustainable going forward and...

Gaurav, please be loud. You are not audible.

Am I audible?

Yes. You can try again.

What would be the margin? This margin would be sustainable going forward? Or there would be a decrease in margins? What is your take on that?

Okay. As a policy, we do not give any guidance. Now as far as whether it will be going down or upwards, our hope is that we'll be able to take it upwards.

Okay, sir. And is there any seasonability in this business?

No, not really, not really. It certainly is a lumpy business, but there's no seasonality as such.

Next question comes from Vaibhav Badjatya from Honesty and Integrity Investment.

So there was some disturbance initially maybe from my line. So I think in terms of expenses, let's say, sequentially, so if we see sequentially, operating and other expenses, they've increased by nearly INR 8 crores. So can you help us understand the specific line item which has grown, which has resulted in this increase?

Yes. Essentially, it is marketing. We have done outstanding work for decades and we have not talked about it as much as we ought to have. So that is why we are also spending some of our attention and money to make sure that people are aware about what we do.

Okay. So out of INR 8 crore increase, you will say most of it is due to increase in marketing expenses. That's what you mean to say? Or there are other things also that has led to -- because I think initially, selling and marketing expenses was given as a percentage, but I missed that because there was some disturbance in the line.

Tapan, you want to take this?

Yes, that would be helpful.

Vaibhav, this is Anurag. It's actually a combination of marketing and marketing related travel costs. We are basically investing a lot in enhancing our connects with our executive customers and in that particular direction, also significant travel is happening. So it's a combination of both.

Got it. Understand. Understand. And this push is more towards international business or more to do with the domestic business?

A combination of both.

Okay. Got it. I understand. And sir, in terms of revenues, if you see the revenue breakup, India revenue have sequentially, again, I'm talking about sequentially as compared to the last quarter, June 2023. India business revenue has gone up nearly by INR 20 crores. So I don't want to know specific numbers, but if most of the revenue increases due to AMC revenue increase or is it non-AMC revenue increase? I don't want to know again specific numbers, but I just want to understand the majority of the growth drivers.

Yes, it is AMC pricing related.

Okay, got it. And lastly, sir, in terms of the number of employees for the current quarter, September quarter, what was the total number of employees?

Anurag?

So as of 30th September, our strength was INR 1,908, 1-9-0-8. And then previous quarter, we stood at 1,832.

[Operator Instructions] Next question comes from Ashwini Desai from Oaklanecapital.

I had a couple of questions. First one was because of this price hike, have you seen any loss in customers? Have you seen any churn?

Okay. Let me give you a slightly longer answer to this simple question. We have been adding value to our customers' businesses. So in such an immense manner and at such highly discounted prices that because of both reasons, despite the increase in prices, none of our customers have moved out of our intellectual property. And not just that, some of them are very, very keen to move to our new releases, and we are very hopeful about being able to move them to the new leases soon and then add even greater value to their business. Does that answer your question?

Sir, that partly answered my question. So when you're saying you're very discounted, discounted to whom? Who is your closest competitor in this space?

No, no, no. Again, it's a very good question. I'm talking about the global prices as compared to global prices for the -- for this kind of intellectual property, we will be deeply discounted.

Okay. Okay. Okay. Fair enough. So I mean you don't expect any kind of churn in the future?

We do not visualize that because not just that we have delivered value in the past, not just that we are delivering value currently. Our new releases, they will -- our customers are confident that they will deliver even more value. So we do not visualize any churn.

Okay. Neither in India nor globally?

Yes. Correct.

Okay. Okay. Great. Sir, again, stressing on that, sir, who is your closest competitor? Somebody with a similar offering, if you can give some names in India or globally?

We do not talk about our competitors, Ashwini.

Okay. Okay. Okay. Fair enough. And I think one another question I had. So it has been partly answered though, but I'm repeating it. So when you mentioned in your initial comments that you're looking to increase capacity as such, right? So this capacity increase that you're talking of is to do with the head count increase that you mentioned, marketing or anything else that we are spending on?

Okay. Good question. It is across the board. It's capacity increases on the project management side, on account management side, on marketing side as well as engineering side.

Okay. Okay. Sir, possible to quantify, how much we might have spent in the first half?

Sorry, how much have -- would we have spent in first half on what?

On this capacity increase that you're talking across the board that you mentioned?

Okay. I think we do not share.

Yes, yes. We will not be able to share that level of detail.

Next question comes from [ Narayan Singh from Navanand Securities Limited ].

Congratulations to Mr. Dusad for the-- for adding value to the company, taking up this price increase and so on. I just have one question related to this employee increase. So you are saying like you plan to increase the employee count by 300. So this is on top of existing 1,908 or it's already...

Yes. No, no, you got it exactly right. This is on top of the 1,908 now.

Okay. Okay. Okay, sir. In this quarter, I mean maybe, again, I'm going back to this price increase topic, which you for whatever reasons do not want to disclose more details. So did we have any price increases in this quarter also, sir, any customer, any contractor onboarded?

Certainly, certainly, certainly.

Okay. I have next question, which is related to the growth in other areas. So I just was looking into the financials in the past years. So we are able to grow, looks like, very well in India domestically. But for some reason I don't see any -- much growth outside India. So any special reason, sir, why we are not able to penetrate overseas?

No, no. Absolutely -- you're absolutely right in making that observation. We are making a sharp -- we are providing a sharp focus to our customers in India. And in some manner, that sharp focus has helped both the customers as well as the company. Now we are ready to provide focus to all our customers all over the world and be looking forward to growth coming back to our -- growth coming back in our numbers for various geographies soon.

Next question comes from Rahul Jain from Dolat Capital.

I just have a couple of questions. I heard somewhere in your remarks where you possibly said that all the Indian clients have most of the new pricing and overseas is still left. Is that understanding right?

No, it is partially right. All the Indian customers have moved to the new pricing and some of the overseas customers have also moved to the new pricing. Not all overseas customers have moved to the new pricing.

And you also said somewhere that there is a certain time line by which you expect this to be completely done. What was the time line? Sorry, I missed that?

Yes. I think this financial year and maybe a couple of more quarters in the next financial year.

Okay. Okay. So basically, let's say, 4 to 5 quarters from now, it will be done with.

Yes, yes. That's right.

Okay. And any thoughts on the new deal momentum? We have seen the order book for our business coming off during this quarter. So any thoughts on those?

Yes, we are getting good interest, and there will be announcement about some orders as well in the near future.

I think last quarter, you were mentioning about a very large deal in the -- for the FinnAxia offering. Is that still in the pipeline? Or it's not been won or something?

No, no, it's very much in the pipeline.

Right. And this large jump in the marketing cost that you said related to marketing, is it more related to like attending event like Sibos or fintech events, those kind of thing? Or this is a client-specific travel to meet and do business development and your business as usual kind of a travel?

I would say both. We've been participating in events also. We've been traveling to meet our customers also, understand them better and understand their challenges better and so on.

So I mean, the key reason of asking this question was to understand whether this is a new normal on the spend? Or this is slightly accentuated because of more events in this quarter and they possibly come off in the coming quarter? That is what I'm trying to understand.

Yes. So it's going to be new normal because, as I mentioned earlier, we have not talked about our value addition that we have done -- the immense value addition that we have been doing to our customers. And that's what we want to do now. We want to talk about it and let people understand that there is a robust institution, which they can rely upon for long-term value addition.

Right. And this would be also expanding newer market or mostly of the 4, 5 key market that we are currently present?

To be with the existing market and, of course, at an appropriate point of time the new geographies also.

So you said you were initially trying to map it with the revenue momentum, but then nevertheless, you went with the flow irrespective of the traction, which caused the margins to come off in this quarter. So since you would persist on the spend and revenue growth can be slightly lumpy by the nature of it. So is there a base margin that you would like to have on an annualized or quarterly basis? Or it would be -- it would continue to be volatile function of growth?

I would like to say the second, volatile function of growth.

Sorry, I could not understand that.

Yes. So I don't think we are seeing -- I mean, we would be able to give any guidance either on in terms of revenue growth or in terms of margins and so on. What we are sharply focused on is ensuring that our customers get value and all our other stakeholders get value quarter-to-quarter, year-to-year. I don't think we are in a position to give you any indicators.

Right. And the 300-odd people addition that you have kind of indicated, this roughly implies 15% growth so on the current base. So most of these would be going into the implementation kind of strengthening? Or this would be across function and not limited to servicing side?

Yes, absolutely. As I answered earlier also. It will be across functions, right, from marketing through account management, through implementations, project management and engineering.

Right, right. Understood. Understood. And any -- sorry, on the new win side, can you give us how many new client logos or renewals are disbursed in the quarter or anything in the last couple of quarters, how has that been shaping up for us?

No, I don't think we will be able to talk about that, Rahul.

So earlier, we used to give one data that how many clients went live and how many divisions we have won during the quarter. So do you think this would be discontinued or this is a temporary thing that we are not publishing them?

I think we will -- we have to continue striking balance between as much transparency as we can bring to our shareholders versus the market scenario. And as that balance keeps shifting, we will also -- we have no choice but to keep doing that balancing.

Next question comes from [ Aditya Nahar ] from Alpana Enterprises.

Could you please give me a texture of your addressable -- how much market share are we targeting in this?

Sorry, couldn't get your question.

Sir, could you give us the total addressable market that Nucleus is targeting, sir?

That is a very sizable market. Very, very sizable market.

Sir, do you mean $10 billion and above $20 billion and above, sir?

Yes, yes, yes, good guesstimate. It is in the vicinity of, let's say, $20 billion to $30 billion. The cost of software for lending business is typically anywhere between 0.5% to 1% of the AUM. So we can make a guess from there how big that market would be.

Absolutely, sir. And then is it fair to say, sir, we can be 3%, 4%, 5% of this market, sir, with the capability of our product offering?

Certainly, certainly.

And for that, sir, would you need the cash on the balance sheet? Or do you think that it's more now about our sales and a marketing function?

Yes. Now these are balancing decisions that the Board will take, how much do we want to pay to the shareholders at what point of time and how much should go into the building -- building the brand and making sure that people come to know about the outstanding product that exist.

Right, sir. Sir, one, just a suggestion, sir, if you don't mind. Please don't take it the wrong way. I believe you when you say that you have an outstanding product, et cetera. But if you could just start giving us certain level of customer churn, customer data, et cetera. We don't want any forward looking guidance. But if you could just tell us what's happened, good or bad. I mean I'm sure given your level of technical competence and understanding, you would be okay to share churn level data because since you're a product company, sir, one important metric is tracking churns. Only if you are okay with it and if your internal team approves it, of course, if you could share that level of data, sir. We don't need customer names, we don't need -- maybe we say international churn domestic churn, so we can -- it'll just help us better understand your company, frankly sir, that's the only reason.

Yes, sure, sure. Thanks for raising that question. And I'm very glad to let you know that voluntary churn of our customers would be less than 5%, not even that. The philosophy has been that if a customer has taken a decision to go on our product, then we -- after once customer has signed up and has gone live, it is our all-out effort to make sure that the value continues to get delivered. So that's all I can say. It's a pretty small number -- extremely small number.

And just one last question, and you can choose however you want to answer it. Sir, I'm sure that if I am a vendor or some client of Nucleus and my prices go up maybe 5x or 6x, for a contract for which I have been giving normal inflation increases, there must be some push back definitely. How you're handling the situation, sir?

Again, excellent question. Only thing that we talk about is the value that we have been delivering. I'm very, very delighted to let you know that when we start talking about it, we have already mentioned it. All of them have agreed that yes, this is required to be done. And yes, that's what.

So what you're saying is they're viewing Nucleus more as a partnership more than a vendor relationship. Is that a fair understanding, sir?

Absolutely, fair understand.

Great, sir. I just hope you give out a little more details regarding the product, the churn, maybe the average per customer. Again sir, broad level data, we're not asking any specific data, if it's okay with you. Just for our better understanding of your the company.

Thank you. Thank you for your continued interest. And since we service very small customers and the biggest customers in the country, obviously, averages, et cetera, do not make sense.

Right, right. No absolutely, sir. I just -- like I said, it's just for our understanding. There's a barbell, obviously, some customers will be very large, some will be very small. But just for our better understanding, no other reason, sir.

Next question comes from Anuj Sharma from M3 Investments.

Congratulations, Vishnuji and team, for a good quarter. Few questions, sir. One, we spoke about the lower-than-expected revenues in Q2. What was the reason for this spillover?

We were expecting certain orders and they didn't come through. They got delayed, yes.

Okay. So there will be a spillover, it's not a lost revenue, it's a spillover?

Yes, that's it.

Okay. The second thing is, sir, we'll be focusing on overseas customers for the value-added price adjustment. But the reason for delay is the lack of focus. Initially, we plan to focus on domestic and then international or it's been difficult to convince international customers or the value proposition?

No. The first one. We wanted to focus first on domestic customers and then go international. And that's what we are doing.

Okay. Okay. Sir, the third thing on price adjustment. Now once the price adjustment based on value proposition is done, incrementally how does it work? Does it work on some outcome basis or then it will be a flat pricing or just a one-time adjustment and then it will be flat? Or there will be some flexibility in terms of either inflation or outcome based or transaction based?

All the facilities are there in the picture. So that is a win-win -- ongoing win-win for our customers and us.

Okay. So even after the range -- readjustment is done, let's suppose the outcome, the transaction volumes increased by 10%. Then is it fair to say that Nucleus will also be a beneficiary of the increased transaction output going forward?

Yes, yes.

Okay. And sir, one more question is, we have a significant market share in domestic. And on [indiscernible] it's a happy development that we are focusing on sales and development. But will it be predominantly global now because there wouldn't be many gaps in the Indian market for you? And is it fair to say that our next leg of growth after the repricing of international customers will be new international customers?

That is right. That is absolutely right.

That would be the last question for the day. Now I hand over the floor to Swati for closing comments.

Thank you, Pelcia. Now we would like to thank all our investors for joining us today. And a very happy and prosperous Diwali to all of you. I will now pass it over to Vishnu sir for his closing comments. Over to you, sir.

I would also like to wish all of you a very happy Diwali on my personal behalf and on behalf of team Nucleus. And we continue to be committed to adding value to the society for decades to come. And we want to thank you for your continued interest in us. Thank you.

Thank you. That concludes our conference for today. Thank you for participating. You may all disconnect now.