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

Ladies and gentlemen, good day, and welcome to the R Systems Q1 2022 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, [ Vinita ]. Good morning. On behalf of R Systems, I welcome all participants to quarter 1 2022 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 financial overview by Mr. Nand; and business overview by Mr. Avirag. Thereafter, we'll have a closure statement by Dr. Rekhi. Subsequently, we'll open 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 contains certain forward-looking statements that involve risks and uncertainties. The company undertakes no public obligation to update or revise any such statement. These statements may undertake revision because of the information, future event or otherwise. Actual results, performance, achievement could differ from those expressed or implied in such forward-looking statements. Now 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 and hope all of you and your loved ones are safe and keeping well. The technology companies are continuing to be benefited by a renewed focus towards adaptation of digital technologies post the pandemic. Businesses have accepted the new normal and started exploring new products, business models to convert these challenges into opportunities. We had a robust start to the year 2022, especially on revenue growth. Our revenue grew on year 39% to INR 343 crores, that is USD 45.7 million. The quarter-on-quarter growth is 4.4%. The growth was backed by a strong demand environment for digital and technology services. We added 10 new logos during this quarter with higher deal sizes. The EBITDA for the quarter was 12.1% as against 13.7% last quarter, and 12.5% in the same quarter last year. The quarter-on-quarter EBITDA margins were impacted primarily on account of salary hikes and attrition challenges. Historically Q1 is low on margins and margins gradually improved over the year. Our efforts for rate hike and higher rack rates have started yielding results. However, the full impact of these initiatives will be reflected in the next few quarters. We onboarded more than 80 associates to cater to the growing demand. Profit after tax was INR 29.7 crores as against INR 24.9 crores same quarter last year, and INR 32.8 crores in quarter 4 2021. We continue to have a strong balance sheet with shareholder funds of INR 493 crores and net cash balances of INR 273 crores to support our liquidity and growth. We serve $46 million plus customers, improving seven customers contributing USD 3 million-plus revenues. I will now hand over to Nand Sardana, our CFO, to provide you with a detailed financial analysis.

Thank you, Dr. Rekhi. Good morning to all. Thank you, everybody, for attending this call. I hope you and family are safe and doing fine. Let me go into detail of each line item of profitability statement. Revenue for the quarter was INR 343.2 crores or $45.7 million, quarter-on-quarter increase of 4.4% and year-on-year increase of 38.5%. This increase is primarily on account of volume growth and impact of billing rate increase. We witnessed good revenue growth for our technology and digital services. We're quite optimistic for coming quarters and strengthened our delivery team to cater to growth opportunities. We have added 10 key logos during the quarter. Turning now to gross margin, it was 33.2% in this quarter compared to 34.8% in last quarter, and 34.7% in the same quarter last year. Reduction of 1.6% quarter-on-quarter resulted from salary increments, impact of lesser billable days as offset by impact of billing rate increase. We have got rate hike from existing customers and also improve-- [indiscernible] rate for new customers over the last quarter. It has contributed 1.4% of revenue and helped us to offset the impact of salary hike. Still, we are working on these initiatives to improve margin in coming quarters. Getting down to SG&A expense line. Admin expenses increased quarter-on-quarter by INR 2.9 crores. It was INR 72.1 crores in this quarter compared to INR 69.2 crores last quarter. The increase is mainly due to addition of new sales and presales staff, and impact of salary hikes. EBITDA in this quarter was INR 41.7 crores or $5.6 million compared to INR 45.1 crore or $6 million last quarter, and INR 30.9 crore or $4.2 million in the same quarter last year. As a percentage of revenue, EBITDA was 12.1% in this quarter compared to 13.7% last quarter, and 12.5% in the same quarter last year. EBITDA margins were mainly impacted by salary raises, lesser billable days, but to some extent, helped by improvement in realization rates. We continue to witness strong pipeline for technology and digital service. This will help in further improving the EBITDA margins in the coming quarters. Getting down to depreciation. The total expense was INR 8.2 crore compared to INR 8 crores last quarter, and INR 6.3 crore in the same quarter last year. Interest expense is INR 1.1 crore in this quarter compared to INR 1.4 crore last quarter. Interest expense is primarily due to adoption of Ind AS 116, and we are near that [ feat ]. Other income in this quarter were positive INR 5.1 crore compared to almost similar last quarter. Other income mainly consist of interest income and net exchange gain or losses. There were exchange gain in this quarter. At the end of quarter, we had total forward cover of $35.05 million, with average rate of INR 77.75 and euro cover of EUR 2.1 million with average rate of INR 90.97. This has already been mark-to-market at closing date of 31st March. Over the last 2 weeks, the rupee has depreciated sharply due to global environment, and we have been taking forward covers as per our hedging policy. Our tax expense was INR 7.8 crore in this quarter as against INR 8 crore last quarter. Our effective tax rate during this quarter is 21%, primarily due to [ SEZ ] benefits and lower corporate tax rate in European and Singapore subsidiaries. Net profit after tax was INR 29.7 crore or $4 million compared to INR 32.8 crore or $4.4 million last quarter. Resultant EPS for the quarter is INR 2.51. Getting down to the asset side in the balance sheet. Total receivable, including unbilled at the end of quarter, were INR 260 crore compared to INR 230.8 crore at the end of December quarter. The receivable in terms of DSO was 55 days as at the end of this quarter compared to 52 days at the end of December quarter. This is mainly due to timing reason and our realization from the customer has been in line. Net cash balance were INR 273.4 crore at the end of the quarter compared to INR 277.4 crores at the end of December quarter. The reduction is mainly due to CapEx [indiscernible]facility and taxes paid during the quarter, along with increase in working capital due to timing reasons. We have been constantly generating cash from the business. R Systems shareholder fund was INR 492.6 crores at the end of quarter compared to INR 460.3 crore at the end of last quarter. We have 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. Thank you, Nand Ji and thanks, everybody, for being on the call. I hope everybody is doing good. We continue to focus on digital product engineering and digital transformation projects. The strategy has helped us to get momentum. I would like to give you a brief flavor of our global operation. So digital product engineering and digital transformation continues to be the focus for us on the select key verticals like technology, telecom, finance and insurance, health care, retail and e-commerce. Digital transformation offerings include cloud, analytics, machine learning, artificial intelligence, data and speech analytics, the robotics process automation, IOT, sales growth and these continue to be our arrowhead for growth. On cloud side, we do a lot of work on cloud that include the -- we work on the leading platform like Amazon, Microsoft, Google. We are an advance partner with Amazon, Gold with Salesforce. We see significant traction in the cloud space from our existing clients as well as the new clients that we are getting. Analytics, we see good growth in ML, AI, almost every client talks about ML, AI, data and speech analytics today. We are currently serving many clients in this space and many of our leads come in this space. Mobility, we work on a wide range of technology devices such as Android, IoS, hybrid, WebEx, right from app to enterprise-level application. We had 10 key wins during this quarter with the brief of the wins are: On the product engineering side, a leading healthcare company in the U.S.A., improving the overall health and independence of patient has engaged R Systems to digitize their existing platform to deliver efficiency and enhanced customer experience. Another customer is the U.S. based data management solution that provides -- provider for law firms and legal teams. They've engaged our system to revamp their existing products, taking it to cloud using SaaS-based architecture and AI technology. So we are working on these projects already. Another customer is a global provider of unified IT management solution for security complete. future -- They have engaged R Systems for their digital transformation journey using Salesforce, and they are integrating Salesforce with NetSuite and replacing their existing CRM and invoicing system. In the product engineering side, again, one of the leading telco in U.S. has engaged R Systems to provide expertise in DevOps, CI/CD, automated testing to improve their delivery timeline. In Southeast Asia, a marketing company for sports brand in Southeast Asia has awarded R Systems to implement microdynamics, business central and LS Retail to automate its finance, sales and distribution operation in multiple offices. In terms of our headcount, it increased from 3,548 from Q4 to 3,632 in Q1. We have added 80-plus technical associates to support demand. Utilization is actually decreased from 77.1% in Q4 to 75.8% in Q1 now. We are keeping some bandwidth to handle the growth and attrition. On quarterly basis, geography, North America contributes 70 point -- 71.5%, the largest; Europe is 12.8%; Southeast Asia, 12%; rest of the world, 3.4%. On time concentration side, top 10 clients contributed 22.7% with the largest 6.6%. With this brief, I hand over to Dr. Rekhi for his closing comments. Over to you, sir.

Thank you, Avirag. We have started the financial year 2022 on a positive note with industry-leading revenue growth. Our efforts for improving the realization rates, improvement in utilization, coupled with growth will help us report higher margins in coming quarters. Further, we have taken focused efforts for larger deal sizes to improve our margins. We continue to invest in sales, presales, digital marketing and in newer technologies. These are helping us to win larger digital transformation projects. The business outlook continues to be positive with a strong demand environment as evident from our strong sales pipeline. We are confident of continuing this growth momentum and margin expansion in the coming quarters. We endeavor to utilize our strong balance sheet to support operations and growth. 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.

[Operator Instructions] We'll take the first question from the line of [ Sataynayaranan ], an individual investor. Please go ahead? There seems to be no response from this line. We'll take our next question from the line of Sonal Minhas from Prescient Capital.

Am I audible?

You are, sir.

This is Sonal Minhas. Congratulations on a good set of results. I wanted to seek some guidance with regard to the outlook for this financial year. And given the macro headwinds that the U.S. economy, which is your largest contributor, is facing, are you seeing some slowdown in terms of conversion of new client accounts? I asked this because a large part of your customers are also startups, and just wanted to see some subjective information from you, which is forward-looking, maybe for the next 1 year.

Thank you, Sonal. I'd say it's a good question. First of all, we don't give guidance, but suffice to say that last year, we have grown 32% and this quarter-on-quarter, we have grown 38.5%. For this quarter, our revenue is 45.7 million and quarter 1 had 2 lesser number of days. Quarter 2, that is June quarter has 3 extra days. Similarly, Q3 has similar 3 extra today. So on a run rate basis, we are already at 184 million kind of -- you see historically, 90% is our repeat business, 10% comes from new business. So you can calculate it. We are well on our way to kind of do a similar kind of a growth as we did last time. So that is maximum I would like to say. Coming on to the U.S. recession. Yes, we are also hearing that the inflation rates are rising and the stock market, that U.S. is stumbling, we are also noticing that. But as of now, the demand environment is very good. We continue to have demand for resources. We are still to kind of fill the gap. So I mean, a quarter or so, what will happen, I can't say, but as of now, the demand is very good. And Avirag Ji, maybe you can touch upon the demand environment in our offshore facilities, please.

Right now, as Nand Ji rightly mentioned, the synergies of having the people, adding more people than the demand. Demand is very high today, supply is a challenge. We are trying to hire as many as we can. We have ramped up our recruitment engine actually. So we see good traction, good demand coming our way. So far, we have not seen any -- with anywhere.

Got it. And specifically, with respect to start-ups which you work for or the early phase companies which you work for, any...

Actually, I think we mentioned startup earlier also, there are not so many startups. We work with the companies who are well funded. So it is not like they are on a seed funding or Stage 1 funding. We have -- our customers are not who have [indiscernible]. They are already well funded. They are growing their revenue. It's not like they do not have revenue. That is not our customer franchise. Sonal, the percentage of start-ups in our business is very small. I mean, there is usually some. I'm not saying so. But we are very careful to deal with startups and the proportion is not very high. So you don't need to worry on this.

I understand that, sir. And sir, like is there a metric like people like us for investors who track basically in terms of like days of sales outstanding, something similar, which is a little forward-looking, which you can share, not now maybe for the next few quarters or similar metrics, which can help us just understand that the velocity of -- at which the top line is basically growing?

On this AR thing, I think I have already mentioned that 55 days outstanding. It's in our presentation. So overall, ARs are well under control. And that is the -- I think you have to talk about from AR point of view, right?

I was talking about like -- the unbilled revenue, basically. Something similar to that.

See, unbilled and debtors, we report it combined. Actually, what happens is that with the new guidelines, you have to kind of do that invoicing number and all that. So I think if you look at overall, the average AR is like 55 days -- or it normally is below 60. And unbilleds are not very high-end. This is only just because we have to close, as a biztech company we have to close in a timely manner. So we have to close it. Within a week or so, we are all done with kind of [indiscernible]- most of the time.

Got it, sir. Okay. I understand that. And I think last call or the call before that, you mentioned that you've done some senior level hiring on the sales side. So just wanted to understand like how is that ramping up? What is the subjective commentary around that? Because there's a lot of a lag between productive hiring and productivity with presales staff. So just wanted to understand that.

So this is helping us. In fact, we have invested a lot on sales and marketing activities in the last 2, 3 years. Basically we have done 30% growth -- more than 30% growth last year. And we are kind of the way we are progressing this year, I think the growth is coming up. This is all due to the aggressive hiring and investment in sales and marketing we are doing. So to answer your question, that is yielding good results. And in fact, more results are yet to come. I mean I think that this will further give more results.

So the follow-on to that, not asking for any numbers, so like any improvement in margins, which can be expected given there is some overheads which are there ahead of time? Can we see any improvement in margins from maybe this quarter or maybe just FY '22 numbers?

That is the aim. That is the aim. I tell you we did 14% last year. And you see there are several levers for improvement in margin, as you would know. The biggest lever is utilization, which is a bit challenging as of now in the attrition situation. And the utilization as of now is one of the lowest I'd say. So there is a scope of 1% or 2% improvement in that. But whether that will happen or no, I can't guarantee that. The second lever, of course, is growth. When you grow 30%, [ SG&A ] are going to sweat, okay, that advantage in 1% or 2% should be reflected. So [ SG&A ] is not going to grow in the same proportion. And the most important factor is in terms of billing rate increase. We have started asking our billing rate increase to most of our customers, and the results have been good. There has been good feedback from the customer. And 1.4% of this quarter revenue, if you notice, is the impact of billing rate increase. And I do hope that, that will continue. To some extent, the increase in salary increment, attrition will kind of eat away that. But net-net, it will be a positive number. And one factor, which is not in our control is the exchange rate. You see last year 2021, exchange rate was just flat. But this year, the last year average was 73.75. And the first 4, 5 months, and especially in last 2, 3 weeks, we have seen 77.50, and all that, that factor is not in our control, but as of now, seems to be going in our favor only. So you see, to be honest with you, I don't want to give a number but 1% or 2% improvement in our EBITDA margin is not very difficult. In fact, we aim for higher but that is something which we see -- I mean the 3, 4 factor, I told you, this should help us to -- I mean we want to be at least 2 -- we want 2% improvement and hopefully, I think we are on the right track.

Got it, sir.

[Operator Instructions] The next question is from the line of [ Sameer Rathi ], an individual investor.

Congratulations to the management for excellent set of numbers. My question is regarding the couple of phonecalls back, there was -- like -- it was told that there will be some kind of a dividend distribution policy which will be in place in the days to come, like something like 30% or 40% of the total part to be distributed as dividend. So my question is that have we been able to formulate some kind of dividend distribution policy?

Yes. We have a dividend distribution policy and 30% to 40% or 50% is the kind of -- the policy states that. In fact, last year, between dividend and buyback, we have shared in fact more than that. Total INR 105 crore is the total number in 2021, which is shared with the investors. This is just start of the year. We have just finished our Q1. And normally, I mean, we will remain investor friendly and will follow the dividend distribution policy which is already on our website. So we plan to do up to 50% of distribution of our surplus funds. I mean that is the aim.

And the second part is that -- it's high time that the company -- because it's listed for a long period bit of time, but so far, no bonuses on [ ordinary ], bonuses are not on offer. So are we looking forward for some dilutioning in that aspect?

The bonus is something, to be honest with you, we have not given too much thought to this. Our share price is not very high, there is 250 or so whatever. So as of now, the bonus we have -- this has not been discussed, but I think that's a good suggestion and we will discuss internally with the Board and think over that.

We'll take the next question from the line of [ Abhay Jain ], Retail Investor.

I'm audible?

Yes.

First, I would like to congratulate the management for one more successful quarter. The company has well rewarded shareholders over the years. This can be seen through your share price over the course of 10 years [ in India ]. Company has also done well on revenue front with 40% year-on-year growth. Will this growth continue over the year and further considering we are hearing of recession on our doors in the U.S. market. You have also touched on that in your previous question. I would like that you touch more on that?

Well, Mr. Abhay, you have rightly said, we have grown 40% year-on-year, 38%, 38.5% to be precise. And this growth journey should continue as it is, so and considering the demand environment, I think we will continue this growth journey. And with the U.S. recession, as I mentioned in my previous answer to the question, as of now, we are not seeing that. But we are also hearing the news, the inflation is high in the U.S., U.S. dollar is appreciating and all that. So some concern, we are also hearing. But on the ground, with IT companies, we will admit, IT companies like us, the demand is very high. We are still looking for people, as Avirag Ji just now mentioned. If we get another 100 people in Noida, I think there is a scope for projects to be kind of deployed. So as of now, we see no issue at all.

[Operator Instructions] The next question is from the line of Jagdishwar Toppo from Japa Investment Adviser.

Congratulations to the management team for a good set of numbers. I have a few questions with respect to your expansion plan. You have gotten some kind of approval for expansion of Noida facilities. So what is the status? When do you expect it to get completed? And how much -- what would be your capital expenditure? If I see the last year number from your cash flow statement of last year and the published number, it was about INR 28 crore. So the similar set of number would be how much for this year? And Nand Ji, you mentioned that 100 people you plan to hire. So 100 people would be overall this year? Or how many people would this expansion plan would get accommodated? So this is my first question.

Thank you, Mr. Jagdishwar. I think I'm hearing your voice after a few investor calls. I had not seen you in earlier 2-3 investor calls.

I'm so sorry. I have been traveling. So I have missed your call.

I remember you were there in earlier calls, but not in last 2, 3 calls. Okay. To answer your question on [ exterior ] expansion, you see we have hired more than 800 resources in last one year. So we need the space. So what -- as a tech-friendly thing, we have expanded our SEZ facility in Noida. So the expansion we have done close to 600 kind of facility we have expanded. Out of that, 400 resources facility, there is 32,000 square feet, it's already set, and we'll be getting the procession maybe in a few days' time within this month itself. Another 200 is -- the possession is expected in next 2 to 3 months' time or a little earlier also. And to answer your CapEx, yes, when you expand, you need to have more computers, more network -- all that thing. Last year, we said INR 28 crore. So only I think it will be more or less a little bit on higher side. Exact number I may not have, but I think, but we will be spending aggressively on expansion because that is something which is required. On your last question, the 100 position I said was the open position available in Noida, which needed immediately. Last year, the company has hired more than 800 resources, out of which 600 were hired in Noida itself. I mean I think the kind of growth trajectory I have told you, we will be hiring much more than 100. The 100 number I was saying was the open position as of now. So the plan is to hire many more in line with last year's growth.

Thank you so much, that's so much of your story in terms of your growth plan. So what is the exact hiring ballpark number you are looking at in, let's say, 1 to 2 years' time to address the growth -- the growth opportunity?

We have hired...

1 I mean, overall, I mean, India and abroad as well.

Sure, sure, sure. We have hired 84 -- we have added 84-plus resources in this quarter. And considering the growth pipeline, it will depend upon how our numbers grow. So we may not be able to give you the exact number, but between 100 to 150 maybe every quarter, it would be required -- will be requiring the hiring to continue with our growth journey. So 100 to 150 every quarter are definitely required in each of the quarter.

And this will be mostly in India and abroad also you'd be hiring?

Mostly in India. Eastern Europe also and also in the U.S., of course. See, 80% of business is digital and product engineering business, which is very valuable and most profitable. And most of this business comes out of Noida facility, Eastern Europe and the U.S. Most of this growth is going to come from these. I think the growth in Noida will be the maximum. Eastern Europe #2 in that order and then U.S. in #3. So this is broadly, if you ask me, maximum growth Noida, then Eastern Europe and then U.S.

My best wishes to the management team and all your staff.

Thank you, Mr. Jagdishwar, we miss you. We request you to come in each of our calls.

Our next question is a follow-up from the line of on from Sonal Minhas from Prescient Capital.

This is Sonal. I wanted to understand if you could quantify the deal wins on a quarterly basis, or if you could track that part of your release and share that with investments like other IT companies do? That is just a good way to keep track. I haven't been able to find -- that at one place. So it's more of a question than an inquiry from my side.

We are reporting deal wins. In fact, in this quarter, we have won 10 key logos. In fact, top 5 deals, we report in our press release, Page #2, if you look at...

Sir, the value, the value, the value. So I'm talking about the value.

Value, we do not give. Actually, we have not been giving -- that has not been the policy so far. But I think that's a good suggestion. We will look into this.

That will help just put things in perspective and complete.

We will look into that.

Thank you.

We may close ma'am, if there is no other...

Sir, there are no further questions from the participants. Dr. Rekhi, would you like to add a few closing comments? .

Thank you, everybody, for your -- for taking time to be with us today. And I also thank you for all your good questions, and have a good day.

Thank you, members of the management. Ladies and gentlemen, on behalf of R Systems, that concludes this conference. Thank you for joining us. You may now disconnect your lines.