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

Good morning, ladies and gentlemen, and welcome to R Systems Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kumar Gaurav. Thank you, and over to you, sir.

Thank you, Michelle. Good morning to you all. On behalf of R Systems, I welcome all participants to quarter 2 2022 Earnings Conference Call. We have senior management of R System with us in this call. We will start the call with remarks on the performance of the company by Dr. Rekhi, followed by financial overview of Mr. Nand and business overview by Mr. Avirag. Thereafter, we will have a closing statement by Dr. Rekhi. Subsequently, we will open up for Q&A session. Before I hand over to Mr. Rekhi, let me read 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 obligation to update or revise any such statements. These statements may undertake the reason because of new information, future event or otherwise. Actual results, performance or achievements could differ from those expressed or implied in such forward-looking statement. Now I pass it to Dr. Rekhi for his opening comment. Thank you. Over to you, sir. Hello, Rekhiji?

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 well. The technology companies are continuing to be benefited by renewed focus towards adaptation of digital technologies post the pandemic. The businesses have accepted this new model and started exploring new digital products, business models to convert their challenges into opportunities. With this, I'd like to present an overview of R Systems for the benefit of all those who are joining us in 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 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 media, health care and life sciences, finance and insurance, retail and e-commerce. Our deep industry domain knowledge, combined with our expertise in big data, advanced analytics, AI, mobility, IoT, RPA and cloud help us in transformation of businesses in this digital age. We have witnessed strong revenue during H1 2022, especially for digital and product engineering services. Our revenue grew year-on-year 38% to INR 718 crores, that is USD 94.4 million. The growth was backed by the strong demand environment across all business units. We added 20 new logos during H1 2022 with bigger deal sizes. The EBITDA for the first half of financial year 2022 was 12.6% as against 13% last year in the same period. The EBITDA margins were under pressure primarily on account of salary hikes and attrition challenges. Our efforts for rate hike and higher rack rates have started yielding results. However, the full impact of these initiatives will reflect in the next few quarters. We have onboarded more than 170 associates to cater to the growing demand. During quarter 2, the utilization has improved and there is further scope to improve offshore utilization. Profit after tax was INR 61.5 crores as against INR 71 crores in the same period last year. This was further impacted by mark-to-market loss on forward covers amid sharp rupee depreciation. We continue to have a strong balance sheet with shareholder funds of INR 452 crores and net cash balances of INR 218 crores to support liquidity and growth. We serve $47 million-plus customers as against $33 million a year ago. I will now hand over to our CFO, Nand Sardana, to provide a detailed financial analysis.

Thank you, Dr. Rekhi. Good morning to all. Thank you, everybody, for attending the call. Hope you and family are doing fine. Let me go into detail of each line item of profitability statement. Revenue for the quarter was INR 375 crores or $48.7 million quarter-on-quarter increase of 9.3% and year-on-year increase of 37.1%. The increase is primarily on account of volume growth, impact of higher billable days and rupee depreciation. We witnessed good revenue growth for our technology and digital services. We are quite optimistic for coming quarters and strengthened our delivery team to cater to growth opportunities. There has been good growth from existing customers on top of having 10 key wins during the quarter. Getting down to gross margin, it was 35.3% in this quarter compared to 33.2% in last quarter and 35.6% in the same quarter last year. Increase of 2.1% is on account of higher billable days, increase in billing rates and rupee depreciation as offset by impact of higher average salaries. We have got rate hike from existing customers plus improved rack rate for new customers over the last few quarters. It has, to some extent, helped us to offset the impact of salary hike. Still, we are working on these initiatives to further improve margin in coming quarters. Getting down to SG&A expense line. SG&A expenses increased quarter-on-quarter by INR 11.3 crores. It was INR 83.4 crores in this quarter compared to INR 72.1 crores last quarter. The increase is mainly due to addition of new sales and presales staff, capacity expansion, increase marketing spend and H1 visa fee. EBITDA in this quarter was INR 49.1 crores or $6.4 million compared to INR 41.7 crores or $5.6 million last quarter and INR 36.6 crores or $5 million in the same quarter last year. As a percentage of revenue, EBITDA was 13.1% in this quarter compared to 12.1% last quarter and 13.4% in the same quarter last year. Revenue growth has led the margin improvement quarter-on-quarter but was impacted year-on-year due to impact of salary hikes. We continue to witness strong pipeline for technology and digital services and are committed for further improving the yearly EBITDA numbers during second half of 2022. Getting down to depreciation, the total expense was INR 892 crores compared to almost same last quarter and INR 6.3 crores in the same quarter last year. Interest expense is INR 1 crore in this quarter compared to INR 1.1 crores last quarter. Interest expense is primarily due to adoption of Ind AS 116, and we are near that fee. Other income in this quarter was negative INR 56 lakhs compared to positive INR 5.1 crore last quarter. Other income mainly consists of interest income and net exchange gains or losses. Interest income for the quarter was INR 1 crore. The exchange income during the quarter is negative INR 3.1 crores, mainly due to mark-to-market on restatement of outstanding forward covers. At the end of the quarter, we had total forward cover of $38.95 million with average rate of INR 78.65 and euro cover of EUR 2.3 million with average rate of INR 88.93. This has already been mark-to-market at a closing date of 30th June. Over the last 3 months, the rupee has depreciated sharply due to global environment, and we have been taking forward cover as per our hedging policy. Our tax expense was INR 7.4 crores in this quarter as against INR 7.8 crores last quarter. Our effective tax rate during the quarter is 19%, primarily due to [ SEZ ] benefits and lower corporate tax rate in European and Singapore subsidiaries. Net profit after tax was INR 31.8 crores or $4.1 million compared to INR 29.7 crore or $4 million last quarter. The resultant EPS for the quarter is INR 2.69. Getting down to the assets side in the balance sheet. Total receivables, including unbilled end of quarter were INR 296.8 crores compared to INR 230.8 crores at the end of December quarter. The receivable in terms of DSO is over 58 days as at the end of this quarter compared to 50 days, 2 days ((sic)) [ 52 days ] at the end of December quarter. This is mainly due to timely reasons, and our relation from the customer has been good. Net cash balance were INR 217.7 crores at the end of the quarter compared to INR 277.4 crores at the end of December quarter. The reduction is mainly due to interim dividend paid, CapEx for expansion in SG&A facilities and taxes paid during the first half of '22. We have been constantly generating cash from the business. R Systems shareholder fund were INR 452.3 crores at the end of the quarter compared to INR 460.3 crores at the end of December quarter. We have a strong balance sheet to support liquidity and growth. With that, let me hand over to Aviragji for a review of operations.

Thank you. Thank you, everybody, for being on the call. As we continue to focus on digital technologies and digital transformation project, the strategy has continued to help us in growth and getting momentum. Would like to give you a brief flavor of our global operations. Digital transformation continues to be the focus for us. And instead of key verticals like technology, telecom, banking, and finance, health care, life science, retail and e-commerce, our digital transformation offering includes cloud, analytics, machine learning, artificial intelligence, data and speech analytics, robotics process automation, IoT sales. These continue to be our arrowhead for growth. On cloud, we work on all the leading platforms such as Amazon, Microsoft Azure, Google. We are an advanced partner with Amazon and gold partner with Salesforce. We see significant traction in cloud space. Most of our existing clients and all new leads that are coming our way are in the cloud space. On analytics side, we see high growth in ML, AI data and speech analytics. We are currently serving many key clients in this space. Mobility, we work on wide range of technology and devices such as Android, IoS, hybrid, and WebEx, and we do rights from enterprise -- have development to enterprise-level application. We had 10 key wins during this quarter, the brief of few key wins are under product life cycle management. The U.S.-based leading mortgage insurance company has engaged our system to revamp its legacy platform to deliver operational efficiency and enhanced user experience. Other customer from U.S. is U.S.-based solution provider for energy industry has chosen our system to provide software development, automation testing, data engineering and support for its existing product. Another from U.S. is a leading digital experience agency has mandated our system to provide digital transformation solutions and cloud application for its legacy application. Another client is leader in electricity production in Eastern Europe. They have engaged our indeed R Systems Europe to digitize their customer onboarding process for the household customers in this project. R Systems Europe is integrating the customers onboarding portal with SaaS ISU with Salesforce, along with automating their interaction with their stakeholder in energy sector through UI path automation. In the Southeast Asia, one of the largest footwear and leading lifestyle retailer in Southeast Asia, they wanted our system to upgrade their current market of dynamics, applications to macrodynamics Business Center and LS Central. In terms of our headcount, technical headcount increased from 3,548 last year to 3,718 in H1 '22. We have added 170 technical associates during H1 '22 to support strong demand environment, and utilization fund increased from 75.8% in Q1 to 77.8% in Q2, mainly due to our disciplined execution. We are working to improve utilization for margin expansion. On a quarterly basis, geography-wise, North America contributes, 74.2%; Europe, 10.8%; Southeast Asia, 12.1%. The rest of the world is just 2.9% for us. On quarterly basis, client concentration, top 10 clients contribute 23.1%, with the largest client about 6.7%. With this brief overview, I will hand over to Dr. Rekhi for his closing comments. Over to you, sir.

Thank you, Avirag. Our performance in H1 2022 towards revenue growth is encouraging. However, the margins are shy due to increased salary costs and attrition challenges. Our efforts for improving the realization rates, improvement in utilization, coupled with pyramid rationalization, will help us to improve margins in coming quarters. Further, we have taken focused efforts for larger deal sizes to strengthen the margins. Rupee at present level against USD will also support us to improve margins in H2 2022. We continue to invest in sales, presales, digital marketing and newer technology. These are helping us to win large digital transformation projects. The business outlook continues to be positive with strong demand environment as evident from strong sales pipeline. We are confident of continuing this growth momentum and margin expansion in H2 2022. We endeavor to utilize strong balance sheet to support operations and growth. And this brings us to the end of our presentation today. We will hand you back to the organizers for your questions and our answers.

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

I have a couple of questions. First one is on the demand side now. Now as sir mentioned that, currently, demand is strong, but then how are you seeing the demand going forward, given the recessionary pressures that we are seeing in Europe and U.S.? So like what is your sense on a longer-term perspective? That is my first question.

So Mr. Khurana, on the demand side, we are also hearing that about the U.S. and Europe recession, frankly, telling you, as of now, we are not seeing the impact. As of now, as you will notice that we have grown 37% quarter-on-quarter -- I mean, year-on-year and for the first half also more than 35%. So today, we have open positions, at least 200 open positions, to be filled in, which we are not able to do that because of shortage of talent. So I think probably we are just drop in the ocean, a small company, and our customers are doing well. So -- but I mean, maybe a quarter or so some dip may happen. But I think like we have grown 30% in last 2 years, we probably may grow 5% less or so. But as of now, I do not see any much impact of the demand on our business.

Okay. One follow-up question on that, sir. So are you also seeing the attrition pressure wearing off now? Like we have some startup companies who are laying off those tech people. So do you see, going forward, that attrition will come down sooner than we expected, and then margins will inch up?

I think so. I think so. On the ground, as of now, we are not seeing the less impact of attrition. But I mean, we have been hearing what is happening in the industry. And we feel that going forward, the attrition impact will kind of reduce and that will help improve our utilization, less pressure on average salaries and all that. To be honest with you, as of now, I'm not seeing that. But Avirag, you may like to add, please.

The attrition is definitely -- I will just like to add, obviously, industry is going through a attrition period. Every company faced with that. We are also facing this attrition, but impact on business is not that high. We keep a cushion with our customer, our people. So we do not see much impact of that, but we are also facing attrition but not that significant that it impacts our business.

Okay. And then, sir, may I know the attrition rate for this quarter, per quarter number?

So attrition rate at a senior level, project manager above is very low, actually, less than 5%, 6%. But at the below project manager level, it is close to 25% on an overall basis.

Okay. Okay. And sir, if I go back to the last quarter and the last, last quarter, you mentioned that we would be able to expand our margins by 100 to 200 bps based on the higher utilization levels and all those things that are bringing in this price hike. So are we still sticking with that like hopefully, we can hold that?

I think so. I think so. You see, the last year, we have done 14% EBITDA. The first half, we have done close to 12.5%. Historically, if you see, the second half is much better than the first half, so I think we are -- we feel that we should be able to do better than last year. And growth is the one which surely is helping us when you grow more than 30%, 35%, it is of help to you. Rupee fortunately is depreciating, which is, again, good for us. I mean, however, the euro depreciation, to some extent, the impacts our 15% European business, which kind of gives us a negative impact. But overall, rupee depreciation helps us, and the billing rate improvement is definitely helping us, but the negative factors are the increase in average will be utilization being not that high attrition. I have a feeling we should be improvised compared to last year. I still hold that.

So last year, we did 14%. This year, if everything goes as planned, we may go up to 15% also?

I can't give you the exact number, but I feel that there's a good chance that we will improvise all that.

Okay, one last question, sir. I've been a shareholder in this company for more than a year now. I've been tracking all the calls. So if I go back 3 to 4 quarters back, there was some mention about the inorganic opportunity that we were eyeing and during that time there were higher valuations on the IT front. But are we still looking into that opportunity now that the valuations are also coming off? So we can elaborate on that.

We always are in look for inorganic opportunities. In any means -- what we look for in any inorganic opportunity is either the good customer base or the good talent base. Whenever we see that, we want to look at that. But off-late our experience in the last 2, 3 years, the valuation has become very expensive, and that is the reason probably we are not able to do a meaningful acquisition. We are still in look for that and anything which fits in our culture and uses these 2 critical things of good customer base, good talent addition, we will be open for that.

Okay. Okay, sir And sir last year, we did give very good dividend. So can we expect the same thing happening this year also?

We are a shareholder-friendly company. And if you see our past record, we endeavor to do -- I mean, though our dividend policy in the public domain, we endeavor is to distribute more than 50% to our shareholders. So we will kind of look at that. But again, Board is the final decision maker, but we want to be dividend -- shareholder friendly. Yes.

The next question is from the line of Madhav Das, an individual investor.

I would like to congratulate the company and the management for a good quarter, continued momentum. And I know that the company is having its operation in Eastern Europe.

Mr. Das, your audio is breaking. I would request you to use your handset, please.

Now is it fine?