R Systems International Limited (RSYSTEMS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the R Systems Q2 FY 2020 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I now hand the conference over to Mr. Kumar. Thank you, and over to you, sir.

Thank you, Vikram. Good morning. I hope you and your loved ones are safe and in good health during these challenging times. On behalf of R Systems, I welcome earnings conference call. We, as senior management of R systems, will be in this call. We remark on the performance of the company by Mr. Rekhi, followed by financial overview by Mr. Nand and business overview by Mr. Avirag. Thereafter, we will have a closing statement by Mr. Rekhi. Subsequently, we will open up for a Q&A session. Before I hand over, let me read out the customary disclaimer statement on behalf of the company. Investors are cautioned that this presentation contain forward-looking statements that involve risks and uncertainties. The company undertakes no obligation publicly to update or revise any such statements. These statements may undergo reason because of new information, future or otherwise. Actual results, performance, achievement could differ from those expressed or implied in such forward-looking statements. Now I pass to Mr. Rekhi for his opening comments. Thank you. Over to you, sir.

Thank you, Kumar. Good morning, everybody, and thank you for being part of this investor call. I pray all of you are keeping safe and your loved ones are also keeping safe and well. The pandemic has reinforced that technology forms the core of every business, whether traditional or digital. The businesses have accepted this new normal and have started exploring new products, business models to convert these challenges into opportunities. I'm extremely proud that R Systems team has kept up to their commitments for efficiency and is working efficiently during these times. The company has continued to work from home guidelines to ensure the safety and health of our associates, while we continue to provide seamless services to our customers. We are working closely with our customers and other business associates to handle the challenges together. I would like to present an overview of R Systems for the benefit of all those who are joining us for the first time. R Systems was established in 1993 in California as a software engineering company and is spread across 3 continents with 16 development and service centers worldwide. R Systems delivers digital transformation services with new types of innovation and creativity to businesses in various industries, technology, telecom, digital media, healthcare & life sciences, finance & insurance and retail & e-commerce. Our deep industry domain knowledge, combined with our expertise in big data, advanced analytics, AI, mobility, IoT, RPA and cloud, help in transforming businesses in this digital age. In the second quarter of 2020, we have reported revenues of INR 210 crores, that is USD 27.9 million. The year-over-year growth in rupee terms was 3.7%. And in U.S. terms, there was a decline of 4.4%. Q2 revenue in rupees terms has benefited from the U.S. dollar appreciation, new customer addition and offset by delays in certain projects, ramp-downs and temporary discounts to support customers in these challenging times. However, the business environment has improved in last 2 months, and we have done comparatively better than originally anticipated. Our performance on margin was much better with 11% EBITDA for the quarter. The margins were benefited by efficient work-from-home operations, cost-saving measures and rupee depreciation. Profit after tax was INR 16.1 crores as against INR 11.6 crores, same quarter last year. The year-on-year growth is 39%. We serve $26 million plus customers during the quarter, including 4 customers contributing USD 3 million plus revenues. We added 5 key customers. Digital continues to contribute over 40% of our revenues. We have a strong balance sheet with shareholder funds of INR 368 crores and net cash balances of INR 235 crores to support liquidity and growth. I will now hand over to Nand Sardana, our CFO, to provide a detailed financial analysis.

Thank you, Mr. Rekhi. Good morning to all. Thank you, everybody, for attending the call. I do hope that everybody is staying safe and adopted to this new normal. Safety of our employees will be our paramount concern as we navigate these unprecedented times. The pandemic has brought interesting changes in our ways of working and for a technology company like R Systems. It has brought certain new opportunities along with all these challenges. Let me go into detail of each line item of profitability statement. Revenue for the quarter was INR 210.4 crores or $27.9 million, quarter-on-quarter increase of 54 basis points and year-on-year increase of 3.7% in rupee terms. Increase is primarily on account of rupee depreciation as offset by volume decline amidst this pandemic. This volume decline seems temporary as businesses have conservatively reserved cash at the start of lockdown. However, once the unlock started, along with various government streamers, we started seeing the renewed demand, especially for digital offerings. The quarterly revenue numbers are encouraging, if you compare these numbers today with environments, which was at the start of quarter 2. As customers have now started taking new initiatives, we can see improved revenue in coming quarters. As Mr. Rekhi said, we have added 5 key wins during the quarter, and our digital practice is doing well, contributing more than 40% of revenues. Getting down to gross margin. It was 35.87% in this quarter compared to 35.04% in last quarter and 34.90% in the same quarter last year. Improvement of 83 basis points resulted from efficient work-from-home operations, lesser travel and transport, along with rupee depreciation. This was, to some extent, offset by volume decline. Getting down to SG&A expense line. SG&A expenses decreased quarter-on-quarter by INR 82 lakhs. It was INR 52.4 lakhs in this quarter, compared to INR 53.2 crores last quarter. The decrease is mainly due to lesser sales level and cost savings through work from home as offset by H1 visa cost. So SG&A expenses reduced INR 82 lakhs from INR 52.4 crores to -- reduced to INR 52.4 crores from INR 53.2 crores last quarter. EBITDA in this quarter was INR 23.1 crores or $3.07 million compared to INR 20.1 crores or $2.78 million last quarter, and INR 18.3 crores or $2.60 million in the same quarter last year. As a percentage of revenues, EBITDA was 11% in this quarter compared to 9.6% last quarter and 9% in the same quarter last year. EBITDA has improved compared to last quarter as a result of efficient work-from-home operations, cost savings, mainly in travel and rupee depreciation, as I mentioned earlier. We, to some extent, reduced the impact of COVID-19 challenges through various cost-saving measures to protect the margin. Also, rupee at present level of 75-plus is also supporting us. Getting down to depreciation. The total expense was INR 6.62 crores compared to INR 6.57 crores last quarter and INR 4.46 crores same quarter last year. Increase in depreciation compared to last year is due to adoption of Ind AS 116. Interest expense is INR 1.48 crores in this quarter compared to INR 1.26 crores last quarter. Increase in interest expense is primarily due to adoption of Ind AS 116. Other income in this quarter was positive INR 3.94 crores compared to negative INR 1.21 crores last quarter. Other income mainly consists of interest income and exchange gain or losses. Interest income for the quarter was INR 1.55 crores. The exchange income during the quarter is INR 1.49 crores compared to exchange losses of INR 3.28 crores last quarter. Exchange gains and losses are mainly due to mark-to-market gains or losses on these statements of outstanding forward covers. As at the end of quarter, we had total forward cover of $23.1 million -- once again, $23.1 million, with average rate of 75.67 and euro cover of 3.15 million -- euro cover of 3.15 million with average rate of INR 84.30, which has already been mark-to-market at closing rate of 30th June. We have consistently followed this conservative accounting instead of parking such noncash loss in balance sheet through hedge accounting. Our tax expense was INR 2.83 crores in this quarter as against negative INR 1.57 crores last quarter. Our effective tax rate is low in the range of 15%, primarily due to efficient benefits and lower corporate tax rates in European and Singapore subsidiaries. Net profit after tax was INR 16.1 crores or $2.15 million compared to INR 9.5 crores or $1.32 million last quarter. Increase in profit of tax is due to improved operating profitability. The resultant earning per share for the quarter is INR 1.35. Now getting down to the asset side in the balance sheet. Total receivable at the end of quarter were INR 137.8 crores compared to INR 132.4 crores at the end of December quarter. The receivable in terms of DSO were 62 days at the end of quarter -- at the end of this quarter compared to 53 days at the end of December quarter. The increased DSO is mainly due to timing reasons. Net cash balance were INR 235 crores at the end of this quarter compared to INR 199 crores at the end of December quarter. We have been constantly generating cash from the business. Our system shareholders fund were INR 368 crores at the end of the quarter compared to INR 338 crores at the end of December quarter. As Mr. Rekhi also said, we have a strong balance sheet to support liquidity and growth in these times. With that, let me hand over to Mr. Avirag for a review of operation. [ Avirag-ji ]?

Thank you,[ Nand-ji ]. Thanks, everybody, for being on the call. I hope everybody is safe and healthy in this COVID time. We have questioned the world the way it is and move forward. I would like to give you a brief flavor of our global operations. The digital transformation continued to be our focus for the key vertical that we work on, like technology, telecom, finance, insurance, healthcare, life sciences, retail and e-commerce. Our digital transformation offering include cloud analytics to include machine learning, artificial intelligence, data speech analytics, the robotics process automation and sales force. These continue to be there for our business growth. In cloud, we work on all the leading platforms to include Amazon, Microsoft Azure, Google. We are advanced partner of Amazon and [ full ] partner of Salesforce. We see major growth in this area from our existing clients and the new opportunity that we get. In analytics, we continue to expand our strength in machine learning and artificial intelligence, data and speech analytics, currently serving many key clients in this space. In mobility, part has been our offering for long, and most of our customers use some part of the service. We work for Android hybrid, web apps, right from enterprise to the apps all throughout. In this quarter, we have 5 key wins under product life cycle management. One of the customers is a U.S.-based health care provider that has engaged R Systems to revamp their revenue cycle management process using RPA solution to enhance accuracy, efficiency and transparency in claim processing. Another customer is from Canada, a company providing banking solution, has engaged R Systems to digitize its new existing solution. So we are moving the solution to the cloud. Another company, again from Canada, a cloud computing solution provider has engaged R Systems to integrate its existing cloud solution with our leading mobility platforms. Another customer is, again, on the cloud side. Actually, we are getting many clients with our cloud side. It is another customer, which provide inside solutions, has engaged R Systems for a digital transformation to revamp their existing solution. From Singapore side, one of the largest electronic manufacturer in the world, has engaged our APAC division to implement order processing, order management system using D365 business central and LS Retail from our Singapore company. In terms of technical head count, marginal decline of about 100 resources from [ 2,450 ] to 2,335 in this quarter. Utilization -- in the software side, utilization increased actually from 77.9% to 78.8%. In BPO, there is a decline in utilization from a 76.1% to 68% -- 68.7%. On a quarterly basis, by geography, North America contributed 68.3%; Europe, 12.7%; towards Asia, 16.4%; and rest of the world, 2.6%. On a quarterly client concentration, top 10 clients contributed 29.9%, with the largest client, 8.8%. With that brief, I will hand over to Mr. Rekhi for his closing comments. Over to you, sir.

Thank you, Avirag. Let me sum up. While deal conversions may be taking a little longer, however, starting June, we have witnessed good traction towards digital services and solutions using RPA, cloud, IoT, mobility and analytics. We have a healthy sales pipeline as the businesses have now restarted taking new initiatives and accepting this new normal. It has surely enhanced our confidence for the second half of this year. The margins are supported by efficient work-from-home operations and cost-saving measures. The rupee at present level is also helping our margins. The financial stimulus by various governments like U.S.A. and Singapore have supported our businesses by providing much-needed liquidity. Our focused service offerings surge in digital demand, availability of strong digital talent with strong balance sheet gives us confidence for improvement in our future for partners. This will help us emerge resilient and agile in these uncertain times. That brings us to the end of our presentation today, and we are now ready to take your questions. Thank you.

[Operator Instructions] Now we have the first question from the line of Mohan Krishnaswamy, an individual investor.

Sir, congrats on excellent execution in a tough quarter. I had to ask a couple of basic questions. One, there seems to be some borrowings, which have been created this quarter of some small amount. Quite curious to know if -- is this related to the financing scheme in some of the geographies? How would the accounting happen? Would you have to repay the money? Or what -- how should we understand that?

Mr. Krishnaswamy, there is a stimulus given by U.S. government.

Correct.

So that stimulus is actually a loan. However, there are certain conditions. If you fulfill those conditions, that loan is [ forward-given ]. We received the stimulus in May, and we are allowed to spend that money in 24 weeks, that is close to 5 months, 5.5 months. So what will happen is that once the money is spent, which -- so we will apply for forgiveness to U.S. government. We are quite hopeful that we will get this forgiveness 100% or maybe 75%, 80%, 90%, we don't know, but we'll apply for 100%. So until that forgiveness is applied, so that amount is appearing as the loan and net it off from our cash and bank balances. So as soon as we get the forgiveness, that will become probably part of income. So this accounting, we need to check with our auditors, but that is the answer to your question.

So the amount, I think, is INR 22.58 crores?

It's close to $3 million. Yes.

That's what it's there in the cash flows.

Yes, yes.

And other -- in other large company calls, we keep hearing that there is a lot of efforts of vendor consolidation by corporates for clubbing work into all the services, including digital and automation. So how does that play out for us? Any macro ideas on that?

Well, Aviragji, you may like to take it up, please?

Sure, Nandji. Obviously, some companies do consolidation and as a result, sometimes, we get benefited and sometimes, we get affected. So far, in this quarter or this year, I would say, we do not have any impact of any vendor consolidation in our -- any our clients. In fact, we're now the largest telecom company that we work. We -- our business has grown as a result of consolidation there. So we do not see any negative impact right now and it is working for us so far.

[Operator Instructions] We have next question from the line of Rajesh Gupta from SBICAP.

And congrats on a good set of number. Sir, last time in your conference call, you said that probably the existing clients are now -- you are basically witnessing the price renegotiation before the pandemic. So have you seen the prices being cut for the new contract for existing contracts, et cetera?

No, Rajesh. What happened was when this pandemic started like late March and early April, people and putting our customers, they were scared. So few of our customers asked for some ramp down, some temporary discounts. So what we did, we -- based on case-to-case basis, we allowed some price discount for 3 months. The maximum we allowed for us was 6 months. So that has happened. We did not renegotiate the rates, rather we told them that we are with you, we are your partners, and we equally understand your concern. So we allowed some kind of a price discount to at least, I would say, 6 or 7 customers, some for 3 months, some for 6 months. And now, 3 months have already passed. So some of the customer have already availed it and are back to now the original price. Some still have 2, 3 months to kind of go on. But -- it's a normal business transaction, and we keep on -- we want to be partnered with our customer. So there is definitely some impact of this in our numbers, but that impact -- some impact may also come in Q3, but it's not a very huge amount, to be honest with you.

Okay. And sir, you discussed about digital transformation. What kind of percentage -- what percentage of revenue we expect to be leading in the next 4, 5 years? Can you give some road map for that, that how digital is going to really play an important role going ahead? And I suppose that margin in that segment is quite on the higher side. I asked this question on the previous con call also. So where do you see this digital revenue is going ahead in the next 4, 5 years? Can you give some road map for that?

Aviragji?

Yes. So just to give you -- the cloud is integral part of any technical work, any IT work that is happening. These other clients have already or a lot of -- IT companies have already either moved to cloud or moving or planning. So the landscape going forward, the growth will come from our digital offering, which may include cloud, RPA, and [ M&A/AI ] in the next few years. This is the growth, I think the industry is going to witness. So I think we will continue to grow in this area. They are building higher capacities. And obviously, this is helping us to win more contracts and gain more confidence from our existing clients.

And it adds 40% -- more than 40% of revenue comes from digital as of now, just to add.

Okay. Sir, 40% revenue from digital, but still margin is nowhere comparable to the other big players. So where you see the margin, I think a 12% margin for this current quarter is still, I think, in a low, say, double digit. So where is the margin heading towards in spite of having a good business from digital segment?

Rajesh, you have to look at -- from a history point of view. You see -- if you see just 6, 7 quarters or 8 quarters before, we were close to 7 -- 6%, 7% EBITDA. And this quarter, we have reported 11% EBITDA. So there are some cost-saving measures also. See, the digital rates are much better than the traditional product using business. But the cost, like the employees are also who exactly worked on digital are also expensive. But overall, the margins are better. So we have improved over a period, and we will improve. As the portion of the digital increases in our overall revenue, the margins will be towards improvement. So that will happen over a period of time.

[Operator Instructions] We have next question from the line of Manish Shah from [ Vajani Securities ].

This is Manish from Vajani Securities. The main -- my question is regarding work from home. So what -- how do you see this going forward, considering that you have done a lot of cost saving due to work from home in terms of, I think, rent and transportation. And what percentage of your employees are currently working from home? And how do you see this trend moving forward?

So Manish, see, we had no option. When the lockdown started, we had no option and to move it from home. In fact, we anticipated that well ahead of time. And within a week, I mean, we had already started before the lockdown started. Every next 2 to 3 days of lockdown, whole of the company was moved to work from home. And as of now, I would say, 97% to 98% employees are working from home. So as of now, this is a new normal. If you see that our biggest equipment center is Narda, and that cases are kind of on rise. So in Delhi, the cases are reducing. As of now, it seems that at least, next 1 or 2 months, it's not possible to move on to office. But as soon as the situation improves, we want to get back to office. Or maybe what will happen is that maybe 50% office, 50% work-from-home or some per portion, but I think work from home, to some extent, will continue. And coming on to the cost savings, definitely, that because of this thing, there are savings on cost on rental. There are -- actually, rental is not rental savings, whatever must to happen has happened, but now it's a very small savings. But the travel saving is used actually. Our transportation savings is huge, actually. So we have, like other peers in the industry, saved on travel and transport. So to some extent, I think this saving will continue even if we start kind of getting 50% from our office and 50% from work from home. So I think, some new normal will come where that much traveling may not be required. But I think let's see how the things evolve over next quarter or so.

And our plans taking this, there's no choice. But even future, they'll accept this?

See, as of now, the clients are fully supportive. I think I would say at least, 99% of clients have no objection to this because most of our business comes from either U.S. or Europe, and they are also working from home. So as of now, as I said, 99% customer has no objection and they are fine with that. How things evolve, I think we have to wait and watch.

[Operator Instructions] We have next question from the line of Jagdishwar Toppo from [ Japa Investment Advisors ].

Hello, sir. Am I audible?

Yes.

Okay. Congratulations to the management team and all the workers for the good performance in a difficult situation. I have 2 questions. First of all, I want to know how are you contributing financially or otherwise for this COVID-related issues in our neighborhood or in our -- around the world? Any financial contribution? Or -- I did not see any of this in the press release or the annual report.

So Mr. Jagdishwar, as a part of CSR, we have planned our CSR contribution in accordance with government guidelines. So what we did, some portion of CSR, we have contributed towards COVID. So we have contributed for PPE kits, we have contributed for food and clothing. We have done that. To be honest with you, we are a -- we don't want to advertise too much on this. But as a part of our CSR and part of helping the community, we have done that.

Okay. That's great, sir. And my second question is with respect to the distribution of the profits. Historically, when I see, there were dividend and followed by that, there were buyback. But there is no clear cut pattern because there may be taxes and rules and all those things. Plus one of the factors was also we were looking for acquiring inorganic growth opportunities. But our cash on the balance sheet is increasing. And as you said in your presentation also, you are very confident of cash flow generation. So do we have any target in mind or policy in place to -- and look at, let's say, INR 100 generated is spent for, let's say, dividend or buyback or dividend and buyback for the investors and balances for growth, internal as well as inorganic? So that number I'm looking at, I want to understand what's in the mind of the management in terms of the distribution.

Mr. Jagdishwar, as any public company, we have our internal policies for distribution of profit to shareholders. And we have been doing that. So between dividend buyback, we keep on -- depending upon how the taxation rules are, we keep on shifting that also what is most friendly for the shareholders. We did a dividend of -- in January, we had announced a dividend. Right now, we are in August. So I think if you see past at least 1 or 2 times either dividend or buyback we have done, so that is in the mine. So that, I think we will -- Board will be considering that maybe next quarter -- in the next meeting or so, but I can't make any statement on that. And between the shareholder distribution and growth, that is always a policy. We also have internal policy for that. And as you said that we have now sufficient cash, we are actively looking for inorganic growth also. So we are looking at any point of time, we have 1 or 2 companies. But I tell you, we need to be very careful. And especially in this pandemic time, when it is hard to travel and hard to kind of microscopically look at the companies, we want to be cautious here. But believe me, we are seriously looking at these opportunities, and we keep on looking at company where we get better clients, better capabilities. There are 2 things we look at, good clients and capabilities. So whatever -- and in digital space, in our space where we want to expand. So whenever we get this kind of opportunity, to be honest with you, we have not, as such, earmarked that we will spend, let's say, INR 100 crores or INR 50 crores. It will depend upon the kind of opportunity. In addition to that, we have been investing heavily in our organic growth. We have been hiring sales guys, we have been investing, we are hiring these subject matter experts. So both organically and organically, we want to grow. And unfortunately, this year, I'm not sure how much we will grow. But if you see last 2, 3 years, we have been growing between 12% to 15% organically also. So this year has been a challenge because of COVID, but still, we will -- we feel that maybe some kind of a growth we will try to achieve. But all these points, dividend buyback, organic, inorganic, I think we keep on internally discussing in all the Board meeting and our senior management meetings.

[Operator Instructions] Your next question from the line of Praveen Kumar from [ My Trikiran Incorporation ].

Sir, how do you see after the pandemic, are you any -- servicing any airline industry for their back end or anything like that? Do you have any kind of airline industry?

No. No, we do not have a client. I don't think we have Aviragji, we do not have any client on airline this year, right?

You do not have any airline or even portal.

Yes, we do not have...

Based on all, we have been lucky not having these clients.

We are lucky to have not any client in airlines. We have small exposure to hotels, small exposure, but that, too, is very -- not more than 1%. So very little, yes.

What about telecom, sir? What do you...

Yes. Telecom, yes, 30% -- let me tell you. 30% of business comes out of telecom -- more than 30% of business comes from telecom, and that business is going very well. Aviragji, why don't you tell how the telecom is performing, please?

Few sectors, including telecom, health care, these are growing. Again, some of the banking clients, where they do the loans and credit card, that business is growing. And we are operating in all the 3 areas. So telecom business is actually growing for us. Our leading customer, we have grown quite a lot actually this year, who is also our #1 client. So telecom is actually worldwide, this business is growing because of people need infrastructure, the Internet, the phone, connectivity is more needed. So this is actually the growing segment right now. Telecom has a clearly growth, and we operate in both of them.

Mr. Praveen, do you have any further questions? Thank you very much. Ladies and gentlemen, that was the last question. I'd now like to hand the conference over to Mr. Rekhi Singh for closing comments. Over to you, sir.

I want to thank everybody who have joined us in this conference call and supported us. And I, once again, pray that all of you remain safe, and we come out successful out of this pandemic that is upon us. Thank you very much.

Thank you very much, sir. Ladies and gentlemen, on behalf of R Systems, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.