OnMobile Global Limited (ONMOBILE) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I'm Avinash, the moderator of this call. Thank you for standing by, and welcome to OnMobile Q3 FY 2020 Investors Conference Call. [Operator Instructions] Joining us today on the call are Mr. FC, the Chairman and CEO; Mr. Sanjay Bhambri; and Mr. Ganesh Murthy from the management team. Before we begin, I would like to mention that some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. For the list of considerations, please refer to the earnings presentation. OnMobile Global undertakes no obligation to publicly revise any forward-looking statements to reflect future likely events or circumstances. Please be advised this conference is being recorded today. I would like to now hand over the call to Mr. FC. Thank you, and over to you, sir.

Thank you very much, thank you, everyone, for joining this morning. Overall, a good quarter, stable revenues, but we have a lot of new deals that started yielding some revenues, South Africa, Middle East. So on that side, I just want to mention that we have 7 of our 10 -- top 10 customers that actually added growth quarter-over-quarter. So improvement in operating profit, as you can see also, and a very good cash position. So it was a good quarter for cash collection and cash flow, ending position at USD 35 million. So that's a good on the highlights. On the lowlights, I want to share with everyone a couple of points, which are quite key for analyzing our margin. First of all, on the Lat Am side, we've been experiencing some declining in revenues in the last quarters. And just to share with everyone, the loss on this quarter is around INR 29 million, just on this quarter. So it's getting worse and worse. We're in negotiation right now with some key customers to address exactly that point and bring it back. We kept it because we had some expectations to actually start delivering new services and grow our revenues in Lat Am. Lat Am used to be a very important region for us. Now it's very low on the revenues. But obviously, we cannot afford to maintain a position where we lose pretty much $400,000 per quarter. But it has a key impact on our profitability -- on the core profitability. So that's why I mentioned it. The second thing I want us to think about is our gaming investment. We're investing a lot in R&D on gaming to bring the old platform and the Appland platform to the next level. We have very good plans, which we'll be releasing in the coming quarters. But today, from both a distribution point of view, where we activated new clubs, we did activate 8 new clubs this quarter. But obviously, as I explained last time, there's a cost to deploy new clubs versus the actual starting revenues, which take a couple of quarters. So when you look actually at the distribution costs and the R&D costs combined on the gaming, which I really said is a key investment for us, we're talking about this quarter a INR 34 million of loss, which is pretty much $500,000. So when you combine both the Lat Am loss and the gaming investment to our INR 111 million of EBITDA, our core business EBITDA should be around INR 174 million, which is almost USD 2.45 million per quarter. So on a normalized annualized basis, we're talking about $9.8 million. So the -- when you look at the actual EBITDA margin of 7.4%, on the core business, it should read actually 12.9%. So that's an important one that I want to share. And next quarter, we'll be tracking both the gaming investment and the Lat Am situation, so that investors understand a bit more the profitability of our core business vis-a-vis investments or issues in some region. Lastly, I just want to say that we've been working on the business transformation. We changed in this quarter the way we operate. That's a big change, touching everyone. We're changing the way to see a few, so making sure that the customer-facing units are lighter, more agile with the customer and on the core operation that we have less processes and more accountability. So we will see the impact of this in the coming quarters also in our results. So to this, I'm going to ask Ganesh to go through the financials.

Thank you, FC. Moving on to the financials. In the current quarter, our revenues were stable on a quarterly basis with a revenue of INR 149 crores as against INR 148 crores in the last quarter. Our key product lines, that is Videos and Contests product lines, witnessed growth of 4.5% and 9.4 -- 19.4% growth quarter-on-quarter. This quarter, we had the full impact of the newly introduced accounting standard -- Indian accounting standards. So we had to amortize our contract acquisition cost against revenue unlike previous quarter, which had only a 2 months impact of the same. So this contract acquisition cost has impacted our gross margin. But if you look at it on a like-to-like basis, our gross margin remains constant at 53.5% quarter-on-quarter. On the cost front, our manpower cost is down by 5.3% quarter-on-quarter despite the fact that we gave salary increases across the board effective December 2019. We are on track in our process automation and rationalization, which has enabled us to keep this manpower cost under control. Our exit headcount for this quarter stood at 702 people as against 734 people last quarter. Our EBITDA was marginally higher with a 3.3% growth, that is, at INR 10.7 crores in Q2 versus INR 11.1 crores in Q3. Our PBT at INR 9.8 crores has grown by 38.3%. Our profit after tax registered a multifold increase from INR 1 crore to INR 6.5 crores. And our ETR, effective tax rate, is lower and touched to 33.7% in Q3, on account of decrease in deferred tax assets. Our focus on collections this quarter, as FC mentioned, has paid off very well, and this is reflected in our cash balance improving from INR 234 crores at the end of Q2 to INR 253 crores in end of Q3. And this is despite a dividend payment to our shareholders of INR 16 crores during the quarter. A higher collections from the customers has also resulted in improvement of our DSO from 155 days in Q2 to 140 days in Q3, and thereby, also contributing to our favorable cash position. In summary, I would like to say that this quarter has been a quarter of consolidation with focus on collections, cash, cash flow and on closing several deals. The impact of this will be felt in subsequent quarters. We continue to remain focused on our strategy of leveraging Tones and expanding on games and exploring opportunities beyond operator wallet. Now with this, I would like to hand it over back to the moderator and open the line for questions.

[Operator Instructions] We will now take our first question. [Operator Instructions]

This is Amar Mourya from Alf Accurate. Sir, my question is largely towards the revenue growth. Like, if I see consistently from last 5, 6 quarters, we had been degrowing. Now the credit to the management is that from last 2 quarters, basically, your profitability had started improving. So how we should look going forward from the revenue growth outlook and the profitability perspective? And I'm also looking to ask that all the restructuring, which we wanted to do at the employee level, are those done? And how the business looks like? Because there has been a consistent change in the business model over a period of time. So if you can help us understand these 3 things.

Good. Yes, thanks for asking. Yes, can you hear me?

Yes, yes, yes. Go ahead, sir.

Yes. Okay. Perfect. And that's why my introduction, actually -- I want to start tracking every quarter our core business, profitability versus our key investments or key losses in Lat Am. You see this quarter is stable on revenues. Last quarter grew. This quarter should have grown with 7 of our top 10 customer growing. But in some regions like Lat Am, they've been impacting the results down on different situations. So I want to -- in my view, a 12.9% EBITDA margin on the core business should be increased towards at least the 15% mark. So that's what I personally aim at. And that's why I want to track it separately because the more and more you'll see -- the more and more we see huge opportunity on gaming. And the mix is different. The mix in terms of -- it's clearly a product. It's clearly an investment we'll have to make. I really see a big opportunity in the Indian market. We'll have to invest in marketing. We'll have to build our brand, so -- and also deploy globally. So it's very important we start tracking this project separately because it's like a big soup, right? If you put everything in the soup, you won't be able to know what's in, what's out and what's happening. So it's very important that we track the core business separately from the special projects, like gaming, where I see a big future, but that comes with some key investments. And specific situation like Lat Am is the same thing. I mean for me, I don't want to drag on Lat Am every quarter and have losses. So that's the -- the first quarter, we actually highlighted the issue. We've been having the issue for a couple of quarters now. It's getting -- the loss is at its peak right now, and I expect that we solve this situation in the coming quarter. Now in terms of business transformation, we did a lot of changes during the year. Now this new way of operating we just implemented it at the end of -- actually, we just announced it at the end of the Q3 quarter. We're presently implementing the new processes. In many cases, we are cutting down a lot of processes and making way more accountability on some departments. So you should start seeing the impact coming, I'd say, in 1 or 2 quarters. Sanjay Bhambri, you want to add anything on this?

No, I think, FC, you covered it. Beyond that, I think one move was on the stability of the revenues. I -- the question was I think -- actually, I just missed that part. But I think we will continue to be stable on our revenues. And as we have more newer verticals specifically coming from nonoperators from India standpoint, if you have to look at it as they start to go over the next few quarters, that will add to an extent on the revenues.

Okay. So sir, like, now when you say that strategy for financial year 2020 would be grow video, expand games, leverage tools, digitalize content. So is this a part of like how did these all revenues are today? And I mean how we should see this scaling going forward?

Let me tell you that those are the objectives for the year. The year is almost -- from my view, 2020 is almost over. As you know, this is only one quarter left. Now I'm really aiming at 2020-2021. So we'll have a new set of objectives, but clearly in the same line, but adjusted objective. Again, I'm repeating myself, but I really see a big market in gaming and contests. And those 2 lines should definitely grow in the -- during the year. So that's the main focus that we'll have, which will come with investments. So that's why I really want a separate and be able to explain to you investors exactly what's the core business and what's the new projects. And on the core business, there's other projects that are really adding also, like for Tones, I really believe in being able to actually monetize advertisement on Tones, especially with all the changes that happened in India. So as you can see, the Tones business in India has been very difficult in the last 2 years. Now it has really stabilized and should start growing with new initiatives like advertisement on Tones in the coming quarters.

So sir, outlook for financial year '21? Yes, go ahead, go ahead, sir. Go ahead, sir. You were saying something.

I would like to add to the last item on your question on profitability. As you can see, if you look at the last 8 quarters, we were -- our EBITDA was in double digits, okay, on a [indiscernible] basis after amortization of the contract acquisition cost. And the last 2 quarters, we have crossed the triple-digit mark. So last quarter, it was INR 107 million EBITDA. This quarter, it is INR 111 million. I know it's not a fantastic growth, but at least we have crossed the INR 100 million mark per quarter in terms of EBITDA. So EBITDA is -- profitability is improving over the last 2, 3 quarters.

So sir, like, if I want to stick -- because I'm a long-term investor into your company, right? But what I'm trying to understand from an outlook perspective, I mean, what is our outlook for financial year '21 in terms of the profitability and in terms of the revenue mark and in terms of the growth?

As you know, we're not supposed to give a forecast. But all I can say is that back on the 12.9% on the core business in EBITDA margin, that's for me has to increase. And we're doing -- again, that's why I'm tracking the gaming revenue aside and profitability and costs aside. We're doing quite big investments in gaming and that, for me, will bring growth on core of the core business, which is stable. So I'm really expecting a decent growth throughout 2021.

So I'm not asking for a guidance, sir. What I'm trying to understand here is that if I see your last 5 years, from INR 800 crores of top line, we are now going to close something around INR 500 crores kind of a top line in financial year 2020. So basically, every year, we had degrown almost by INR 100 crores. So idea here is like how do we see -- is it like the pain is behind and from here on at least we should see 20% growth going forward? Or still we are going to see a degrowth in the revenue?

Well, if you look at the last year, I think we stabilized the revenues and that shows clearly. You're totally right that last year, it was a tough year, year-to-year. But if you compare last year to this year, it's very stable. So I'm expecting, of course, that we grow from here. I think we -- again, as you know, the telecom industry in India was terrible. And actually, if you put aside India, we actually grew in Asia, we grew in Middle East, Africa, we grew in Europe. It's been very difficult in Lat Am and very difficult in India. And that's why you see the actual revenue going down. I see no -- I don't see major disturbance in our core markets today. And I see new products being launched and being deployed that will bring traction. So that's why I'm really -- I'm quite positive on the next year.

So all your new products are now profitable? Or still they are making losses?

No, no. Again, that's why I'm tracking gaming separately. This quarter, we are losing INR 34 million on gaming investment. And that's for 2 things. All the deployments of new clubs. We're now up to 40 life clubs. And the R&D investment. We're putting a lot of money on the platform to bring it to the next level. So that -- as soon as we have something to announce to the market that we can show the new platform upgrades, I will share with all of you on this so you can assess the potential of this.

Okay. But then still we are going to make losses in the gaming and other businesses, I mean, barring the core business?

Only for the coming quarters, only the coming quarters. My view is that this will start bringing real revenues, and we should be in a breakeven situation at the end of the year on that front.