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

Ladies and gentlemen, good day, and welcome to the R Systems Q3 FY 2020 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kumar. Thank you, and over to you, sir.

Thank you, Stephen. Good morning to all. I hope you and your loved ones are safe and in good health. On behalf of R Systems, I welcome all participants to quarter 3 2020 earnings conference call. We have senior management of R systems with us in this call. We will start the call with opening remarks 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 closer statement by Mr. Rekhi. Subsequently, we will open up for Q&A test. Before I hand over, let me read out the customary disclaimer statements on behalf [Technical Difficulty] Investors are cautioned on 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 revision because of new information, future events or otherwise. Actual results, performance, achievements could differ from those expressed or implied in such forward-looking statements. With this, I'm handing over to Mr. Rekhi for his opening remarks. Thank you. Over to you, sir.

Thank you, Kumar. Good morning, everybody, and thank you for being part of this investor call. As Kumar mentioned, I also trust that all of you and your loved ones are keeping safe and keeping well. This pandemic has reinforced that technology forms the core of every business, whether traditional or born 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 of R Systems team for their commitment and efficient working in these times. The company has continued the 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 these challenges together. With this, I'd just like to present an overview of R Systems for the benefit of all those who are joining this conference for the first time. R Systems was established in 1993 in California as a software engineering company and is now spread across 3 continents, with 16 development and service centers worldwide. R systems delivered digital transformation services with new types of innovation and creativity to businesses in various industries, technology, telecom, digital media, healthcare & life Science, finance and 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, helping transformation of businesses in this digital age. During the third quarter of 2020, we have reported record revenues of INR 224 crores, that is USD 30.3 million. The year-on-year growth was 13.6%. In U.S. terms, it is 7.7%. The revenue growth is primarily across all business units, led by strong traction towards digital and product and delivery services. We reported strong EBITDA margin of 16% for the quarter. The margins were benefited by revenue growth, efficient work-from-home operations and improved utilization. Profit after tax was INR 27.1 crores as against INR 10.9 crores same quarter last year. The year-on-year growth is more than 100%. We serve $28 million plus customers during the quarter, including 5 customers contributing USD 3 million plus revenues. Also, we added 7 key customers. Digital continues to contribute over 40% of our revenues. We've added net 170-plus technical associates during last quarter to support the strong sales funnel. We have a strong balance sheet with shareholder funds of INR 394 crores and net cash balances of INR 262 crores to support liquidity and growth. I will now hand over to Nand Sardana, our CFO, to provide you 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 adapted to this new normal. 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 these challenges. Let me go into detail of each line item of profitability statement. Revenue for the quarter was INR 224.3 crores or $30.3 million. Quarter-on-quarter increase of 6.6% and year-on-year increase of 13.6% in rupee terms. Quarter-on-quarter increase is primarily on account of volume growth and year-on-year increase is augmented by rupee depreciation, in addition to volume growth. Businesses have now accepted this new normal and coupled with various government stimulus, we started seeing the renewed demand, especially for digital services. We witnessed record quarterly revenue as customers have now started taking decision for digital transformation. We are quite optimistic for coming quarters, especially for digital engineering services. As Mr. Rekhi said, we have added 7 key wins during the quarter, and our digital practice is doing well, contributing 40% plus revenues. Getting down to gross margin. It was 37.91% in this quarter compared to 35.87% in last quarter and 33.88% in the same quarter last year. Improvement of 2.04% resulted from improved utilization, volume growth and other savings. Getting down to SG&A expense line. SG&A expenses decreased quarter-on-quarter by INR 2.9 crores. It was INR 49.5 crores in this quarter compared to INR 52.4 crores last quarter. The decrease is mainly due to continued cost savings through work from home and other -- and also last quarter, there was H1 visa cost. EBITDA in this quarter was INR 35.6 crores or $4.81 million compared to INR 23.1 crores or $3.07 million last quarter and INR 15.5 crores or $2.18 million in the same quarter last year. As a percentage of revenue, EBITDA was 15.9% in this quarter compared to 11% last quarter and 7.8% in same quarter last year. EBITDA has improved significantly as a result of revenue growth, improved utilization and cost savings, mainly in travel and transport. On year-to-date basis, we have achieved EBITDA of more than 12%. We hope to improve this on a yearly basis. Rupee at present level is also supporting us. Getting now to depreciation. The total expense was INR 6.44 crores compared to INR 6.63 crores last quarter and INR 4.51 crores same quarter last year. Increase in depreciation compared to last year is due to adoption of Ind-AS 116. Interest expense is INR 1.49 crores in this quarter compared to INR 1.48 crores last quarter. High interest expense is primarily due to adoption of Ind-AS 116. Other income in this quarter are positive INR 5.64 crores compared to INR 3.94 crores last quarter. Other income mainly consists of interest income and exchange gain or losses. Interest income for the quarter was INR 1.56 crores. The exchange income during the quarter is INR 3.34 crores compared to INR 1.49 crores last quarter. Exchange gains and losses are due to mark-to-market gains and losses on restatement of outstanding forward covers. As at the end of quarter, we had total forward cover of $25.70 million, with average rate of INR 76.39 and euro cover of $2.80 million, with average rate of INR 86.33, which have already been mark-to-market at closing rate of 30th September. We have consistently followed this conservative accounting instead of parking such noncash loss in balance sheet to hedge accounting. Our tax expense was INR 6.15 crores in this quarter as against INR 2.83 crores last quarter. Our effective tax rate is now in the range of 18%, primarily due to SEZ benefits at Noida and lower corporate tax rate in European and Singapore subsidiaries. Net profit after tax was INR 27.1 crores or $3.67 million compared to INR 16.1 crores or $2.15 million last quarter. Increase in profit after tax is due to improved operating profitability. The resulting earning per share for the quarter is INR 2.27. Getting down to the asset side in the balance sheet. Total receivable at the end of quarter were INR 114.8 crores compared to INR 132.4 crores at the end of December quarter. The receivable in terms of DSO were 53 days as at the end of this quarter compared to almost similar 53 days at the end of December quarter. Net cash balances were INR 262 crores at the end of the quarter compared to INR 199 crores at the end of December quarter. So we have constantly generating cash from the business. R systems shareholder fund were INR 394 crores at the end of this quarter Compared to INR 338 crore at the end of December quarter. So we have a strong balance sheet to support liquidity and growth. With that, let me hand over to Avirag Ji for review of operations. Avirag Ji?

Thank you, Nand Ji, and good morning, everyone. So I hope everybody is safe and healthy in this time. We have now accepted this word the way it is, but I think things are getting better now as So our investment over last year in digital technology has fueled the growth that you have seen in this quarter, and it has been growing over a period of this period of time. I would like to give you a brief flavor of our global operations. Digital transformation continued to be our focus for quite some time now and in our key verticals like technology, telecom, finance and insurance, health care, life sciences, retail and e-commerce. Digital transformation includes services in cloud, analytics, machine learning, artificial intelligence, data and speech analytics, RPA and sales force. We continue to be the arrow heads for our growth. On the cloud, we work on all the leading platforms include Amazon , Microsoft, Google. We are advanced partner with Amazon, Gold partner of Salesforce, and we work with major in the cloud space. Most of our existing clients are talking about this and new prospects are in the cloud space. Analytics, we continue to expand our strength in ML/AI data Penalties for at least having many key clients in this space. Mobility, we work on wide range of technology devices such as Android right from app to enterprise applications. In this quarter, we had 7 key wins. The brief of these business are: one, one of the leading real estate appraisal management company has collaborated with R Systems to digitize their existing application to move from monolithic to cloud visibility multi-language flavor. Another is Canada leading software solution provider for water data management. They have engaged R Systems to migrate their existing position to AWS cloud using micro service architecture been ensuring scalability, high availability of their product. Another company, which is a cloud-based automatic -- automotive retail marketing solution providers. They have engaged R Systems to providing engineering and testing services to enable the automotive retailer to manage their service operations. We have actually quite a few clients in this space already. Another one is the largest telecom provider in Switzerland, they are engaged with our European subsidiaries to develop a new voice services for their subscribers to enhance their experiences. In Southeast Asia, a Singapore-based vertical farming company has awarded our APAC subsidiary [ to Microsoft Dynamics ] Cloud-based ERP business to automate and integrate their key business processes. In term of head count, technical head count, we added 170 plus technical associates and moved from 2,335 in Q2 to 2,506 in Q3 to take care of a strong sales funnel and a growth in existing customers. Utilization, we have marked one of the peak utilization level, while handling the challenges around the virtual work environment. In IT, our utilization is almost 78.8% and up 1% vis-a-vis last quarter. In BPO, we have increased from 68.7% to 80%. This is quite a jump in BPO side. On a quarterly basis, our geography, North America contributed 66.8%; Europe, 13.3%; Southeast Asia, 17.8%; and rest of the word, 2.1%. On a quarterly client concentration [indiscernible] clients contributed [ 68.7% ], with the largest client 38%. With that brief, I hand over to Mr. Rekhi for his closing comments. Over to you, sir.

Thank you, Avirag. Let me sum up. We have retained momentum to report revenue and margin growth in financial year 2020. For year-to-date September 2020, we have grown about 8% in the 9 months, with strong margin improvement. That makes me feel positive for future growth. Business outlook has improved significantly over the last 1 quarter on the back of renewed interest for digital services in this new normal amidst the pandemic. We are continuing work-from-home operations to meet customer expectations, along with safe work environment for our employees. The financial stimulus by various governments, U.S.A. and Singapore, have also supported our businesses, and it is fueling much needed liquidity. We remain focused to partner customers in delivering digital transformation. We have maintained strong balance sheet to support operations and growth. I'm quite optimistic for next level of revenue growth with strong margin for coming quarters. and we have accordingly expanded our associate infrastructure and infrastructure accordingly. This brings us to the end of our presentation today. And I will hand you back to the organizers for your questions and our answers. Thank you.