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

Ladies and gentlemen. Good day, and welcome to R Systems Q2 FY 2021 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, Nirav. 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 2, 2021 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 Dr. Rekhi, followed by a financial overview by Mr. Nand and business overview by Mr. Avirag. Thereafter, we will have a closer statement by Dr. Rekhi, subsequently, we will open for a Q&A session. Before I hand over, let me read out the customary disclaimer statement on behalf of the company. The investors are cautioned that this presentation contains certain forward-looking statements that involve risks and uncertainties. The company undertakes no obligation publicly or update or revise any such statements. These statements may undertake revision because of new information, future event 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 Dr. Rekhi for his opening comment. Thank you. Over to you, sir.

Thank you, Kumar. Good morning, everybody, and thank you for being part of this investor call. I trust all of you and your loved ones are keeping safe and keeping well. I urge all of you to get vaccinated at the earliest opportunity. We have also organized vaccination for our employees and their families. As on date, more than 65% of our employees have been vaccinated with the first dose, and this number will increase significantly in the quarter -- in this current quarter. The technology companies are continuing to be -- to get benefited by renewed focus towards adaptation of digital technologies post this pandemic. The businesses have accepted this new normal and have started exploring new products, business models to convert their challenges into opportunities. I'm extremely proud of R Systems team for their commitment and efficient working in these timings. With this, I would like to present an overview of R systems for the benefit of all those for joining us in the 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 18 development and service centers worldwide. R System delivers digital transformation services with new types of innovation and creativity to businesses in various industries, technology, telecom, digital and media, health care and life sciences, finance and insurance and retail and e-commerce. Our deep industry domain knowledge, combined with our expertise in big data, advanced analytics, AI, mobility, IoT, RPA and cloud have helped us in conformation of businesses in this digital age. We have concluded our quarter 2 for the financial year 2021 with a revenue of INR 274 crores, that is USD 37 million. The year-on-year growth was 30%. This growth has been outstanding on the back of new deal closures, deepened relationships with our existing customers and continued traction towards digital and technology services. The EBITDA for quarter 2, 2021 was 13.4% as against 11% same quarter last year and 12.5% in quarter 1 2021. The EBITDA has improved primarily on account of revenue growth. We have onboarded more than 225 associates to cater to the growing demand. The full impact of headcount addition will reflect in the coming quarters. However, quarter 2 utilization has been impacted by project ramp-ups and keeping some bandwidth to handle near-term attrition challenges. Profit after tax was INR 46.2 crores as against INR 16 crores same quarter last year and INR 24.9 crores in quarter 1 2021. The profit after tax has been benefited by inclusion of INR 22.3 crores under other income due to recognition of the stimulus given to us by the U.S. government. We have a strong balance sheet with shareholder funds of INR 469 crores and net cash balances of INR 320 crores to support liquidity and growth. The Board has approved a buyback of INR 30 crores plus expenses and taxes at a price of INR 2.25 to distribute surplus cash over and above the working capital and growth requirements. We served $33 million plus customers, including 5 customers contributing USD 3 million plus revenues. We have added 10 key customers during the quarter. I will now hand over to Nand Sardana, our CFO, to provide you a detailed financial analysis.

Thank you, Dr. Rekhi. Good morning to all. Thank you, everybody, for attending the call. I do hope that everybody is staying safe and in good health. So let me go into detail of each line item of profitability statement. Revenue for the quarter was INR 273.6 crores or $37.2 million, quarter-on-quarter increase of 10.5% at year-on-year increase of 30% in rupee terms. We experienced a robust revenue growth for our technology and digital services. We are quite optimistic for coming quarters and are strengthening our delivery team to cater to growth opportunities. There has been good growth from existing customers on the top of adding 10 key wins during the quarter, as Dr. Rekhi explained. Getting down to gross margin, it was 35.6% in this quarter compared to 34.7% in last quarter and 35.9% in same quarter last year. Increase of 90 basis points quarter-on-quarter is on account of higher billable days and rupee depreciation as offset by reduced utilization. Lesser utilization mainly due to ramp-up costs on new projects and strengthening of our delivery team. Getting down to SG&A expense line. SG&A expenses increased quarter-on-quarter by INR 5.7 crores it was INR 60.7 crores in this quarter compared to INR 55 crores last quarter. The increase is mainly due to addition of new sales and pre-sales staff, increased marketing spend and H1 vis à vis, which is due in this quarter. EBITDA in this quarter was INR 36.6 crores or $5 million compared to INR 30.9 crores or $4.23 million last quarter and INR 23.1 crores or $3.07 million in same quarter last year. As percentage of revenue, EBITDA was 13.4% in this quarter compared to 12.5% last quarter and 11% in same quarter last year. Revenue growth has led the margin improvement despite lower utilization to keep subsisted for growth opportunities. We are committed for further improving the early EBITDA numbers during half 2, 2021. Getting down to depreciation, the total expense was INR 6.3 crores compared to almost similar amount last quarter and INR 6.6 crores same quarter last year. Interest expense is INR 1.1 crore in this quarter compared to INR 1.3 crores last quarter. Interest expense is primarily due to adoption of Ind-AS 116, and we are nearly debt-free company. Other income in this quarter was positive INR 24.9 crores compared to INR 5.1 crore last quarter. Other income mainly consists of interest income and exchange gains. For this quarter, quarter 2, it was -- it also includes INR 22 crores as a result of forgiveness of loans received during the year 2020 and give us an under payroll protection program. Interest income for the quarter was INR 1.9 crores. The exchange income for the quarter is INR 1,900,000 compared to INR 2.6 crores last quarter. As at the end of quarter, we had total forward cover of $29.6 million with average rate of INR 76.69 and euro cover of EUR 2.2 million with average rate of INR 91.91. This has already been mark-to-market at closing rate of 30th June. Income tax was INR 7.9 crores in this quarter as against INR 3.6 crores last quarter. Our effective tax rate during this quarter is 14%, primarily due to U.S.A. stimulus recorded under other income, which is not subject to U.S.A. Federal Tax as offset by higher marginal tax rate in India entity after we have crossed the threshold. Net profit after tax was INR 46.2 crores or $6.28 million compared to INR 24.9 crores or $3.4 million last quarter. Resulting EPS for the quarter is INR 3.86. Moving now to asset side in the balance sheet, total receivable at the end of the quarter were INR 145.8 crores compared to INR 131.3 crores at the end of December quarter. The receivable in terms of DSO were 46 days as at the end of this quarter compared to 43 days as at end of December quarter. This is mainly due to timing reasons and our realization from the customer has been in line. Net cash balances were INR 320.3 crores at the end of this quarter compared to INR 303.1 crores at the end of December quarter. We have been constantly generating cash from the business. As Dr. Rekhi said, the Board has approved a buyback of INR 30 crores plus expenses and taxes to reward shareholders, which is likely to be completed in September quarter. R system shareholder funds were INR 468.6 crores at the end of the quarter compared to INR 426.8 crores at the end of December 2020 quarter. We have a strong balance sheet to support liquidity and growth. And with that, let me hand over to Aviragji for review of our operations. Avirag?

Thank you. Thank you, Nandji. Thank you everybody, for being on the call. I hope everybody is doing good. We continue to focus on digital technology and digital transformation. The strategy has helped us to get momentum. I'd like to give you a brief lever of our global operations. Digital transformation continues to be the focus for the key select vertical like technology, telecom, finance, insurance, health care, life science, retail and e-commerce. Our digital transformation offering includes cloud, analytics, machine learning, artificial intelligence, data and speech analytics, RPA, IoT sales force, and these continue to be the arrow head for our group. On the cloud side, we work on all the leading platforms such as Amazon, Microsoft Azure, Google. We are an advance partner with Amazon and gold partner with Sales Force, which is significant traction in this space. On analytics, we see high growth in ML and AI, data analytics and speech analytics. We are currently serving many key clients in this space. We had 10 key wins during this quarter that these of few wins are, 1 of the global market leads as engaged R Systems to enhance and develop their existing video solution in IPTV and OTT space. Another key there is U.S.-based leading online video platform has mandated R System to revamp their SaaS-based product on web, mobile, TV and Roku platforms. Another 1 is a U.S. leading provider of connective solution for enterprise customers at our industry has partnered with us to develop its IoT-based service and device platform for automation industry. Another 1 in Europe, a leader in electricity production in Eastern Europe has engaged R System as digital transformation partner to automate the onboarding process of household customers [Technical Difficulty] using AI analytics. Another 1 is a leading telecom, as we established partnerships to Europe to customize anything particular system... [Technical Difficulty]

Sorry to interrupt, we are losing your audio.

Hello?

Yes, sir, now it's better.

Okay. In the Southeast Asia and Malaysian home living solutions provided was awarded R Systems APAC division to implement Microsoft Dynamics 365 Business Central solution to optimize its end-to-end retail business. In terms of headcount, we have added 225 technical headcounts in the quarter increased to INR 2,801 -- increased from INR 2,801 to INR 3,030. Utilization is decreased from 78.47% to 76.72% in the quarter, mainly due to ramp-up that we have done for this project. But particularly by geography, North America contributed 67.6%, Europe, 14.3%, Southeast Asia, 15.3% and rest of the world 2.8%. On client interest rate topline, client contributed 25.2% with the largest client, 7.2%. With this brief overview, I will hand you back to Dr. Rekhi. Over to you, sir. Dr. Rekhi, over to you. Hello, Dr. Rekhi, over to you.

Dr. Rekhi, your line is on mute. Yes.

Thank you, Avirag. As we discussed, we reported a promising revenue growth during half year 2021. And as we mentioned earlier, the health and safety of our employees is paramount to us, and we have organized vaccination for our employees and their families. This is necessary and important before moving to work from office or getting to the hybrid mode of working. We continue to invest in sales and in newer technologies, and this is helping us win large digital transformation projects. Further, we are confident of margin expansion in the half year 2, 2021, backed by strong sales funnel and efficient operations. Thank you, and we are ready to take questions.

[Operator Instructions] The first question is from the line of Vicki Roy, an Individual Investor.

So when I see the segmentation of revenue by industry type, I see that we are into technology, telecom, health, finance, insurance and others. Now tech being at -- hovering at around 50% to 60%. Can we get a further drill down under this tech, as in these technologies into electronics, semiconductors or software, et cetera? That would be my first question. The second question is -- so I have seen evolving R Systems having this product engineering DNA and now moving into digital first services. So do you see yourself becoming a key player in the ER&D space and foray into Transportation and Electronics segment. So that would be -- those are my 2 questions.

Thank you, Mr. Vicky. Yes, on the technology side, close to 50% of our revenue comes out of technology side and technology, we covered mostly the independent software vendors. Now -- we do not do a further bifurcation of that. But at a high level, I can tell you that among these ISVs, the telecom would be a big part of it. Then would be the health care, then would be the BFSI space, and when stretching a logistic in that order. So that's the broad bifurcation. Coming on to your question on, yes. You see, we, over the years, R System has brought into a digital transformation company. We have moved ourselves from a legacy product engineering company to more in the digital side. And as on that, 40% of our business comes out of digital technologies to include mobile, cloud, RPA and analytics and all kind of data engineering and all that. So see, I mean, we are close to on a run rate basis, $145 million, $150 million company. So we are not that big, but I think we compete with the biggies even Infosys, Mindtree and persistent of, kind of company. And we see that trend and we have won against them. So we see that we are a key player in this market and are ready to grow faster.

[Operator Instructions] Next question is from the line of Praveen Kumar from Maitri Kirankumar Mehta.

Yes, congratulating on superlative performance. I was expecting a very high dividend because most of the companies have given higher dividends this year after the pandemic. And your earnings are good to give a higher dividend.

Good question, Mr. Praveen. We have declared an interim dividend of 250%, which is INR 2.5 per share in just 2 months before. And we have already announced a buyback of close to INR 30 crores just -- and I think within a month or 1.5 months, I think that buyback should get to be completed. So I think it's a mix of dividend and buyback we have done.

When can we expect the bonus here?

Yes, please go ahead.

When can we expect the bonus shares?

Well, bonus shares, yes, I think if we continue to perform well, if share price continues to perform good, I mean as of now, we have not considered that. But I think maybe when the right time comes, we will come to that.

[Operator Instructions] The next question is from the line of Mr. Sameer Rathi, an Individual Investor.

Mr. Rekhi, congratulations on excellent set of numbers. Yes, in the last concall Mr. Rekhi, you had remarked that as a company, you are hungry for growth. Also, you had alluded to some organic and inorganic method for achieving this growth. Can you throw some more light on this inorganic growth prospect, number one? Number 2 is that you had remarked that presently, the way the things are, you can even double in next 3 years, and it should not be a surprise. Now 3 months down the line, where do you feel this optimism?

[Operator Instructions]

Hello? You may go ahead. Have you done or do you have any other question?