Saksoft Limited (SAKSOFT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Saksoft Limited Q2 and H1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Hiral Keniya from EY Investor Relations. Thank you, and over to you.

Thanks, Lisan. Good afternoon to all participants in the call. Welcome to Q2 and H1 FY '23 earnings call of Saksoft Limited. The results and investor presentation has been already mailed to you, and it is also available on our website, www.saksoft.com. In case anyone does not have a copy of press release and presentation, please do write to us. we will be happy to send the same to you. To take us through the results today and to answer your questions, we have with us the top management of the company represented by Mr. Aditya Krishna, Chairman and Managing Director; and Mr. Niraj Ganeriwala, Chief Operating Officer and Group CFO. Mr. Aditya will start the call with a brief overview of the quarter and H1 FY '23, which will be followed by financials given by Mr. Niraj. We will then open the floor for Q&A session. I would like to remind you that anything that is said in this call, which gives any outlook for the future or which can be construed as a forward-looking statements must be viewed in conjunction with risks and uncertainties that we face. These risks and uncertainties are included, but not limited to what we have mentioned in the prospectus filed with SEBI and subsequent annual reports, which you can find it on our website. With that said, I now hand over the call to Mr. Aditya. Over to you, sir.

Thank you, Hiral. Hello, and good afternoon, everyone. Welcome, and thank you for joining our Q2 and half year FY '23 earnings call today. I know most of you are regular listeners to our earnings call. But I would like to take this opportunity to introduce Saksoft to some of our new investors and analysts who may have logged on to this call for the first time. Saksoft is a digital transformation partner that assists our customers to automate, modernize and manage IT systems through a combination of domain-specific technology solutions and solution accelerators from consulting to support. We have been in business for almost two decades now with offices across 16 locations, covering U.S.A., U.K., Asia Pacific and Europe. We have an associate strength of 2,000-plus employees. The key verticals that we operate are fintech, telecom and utilities, transportation and logistics, public sector, retail and health care. The interconnected nature of the verticals mentioned helps us address a huge market which also facilitates us to cross-sell and upsell service offerings to our clients. These verticals are supported by horizontal service offerings, spanning analytics, cloud solutions, legacy modernization, intelligent automation, application development and testing. As a company, we offer a bouquet of digital transformation services. In terms of performance, I'm delighted to share with you that we have clocked our highest half yearly revenue of INR 312 crores, growth of 44% on a year-on-year basis. During the quarter, our revenues grew by 43% on a year-on-year basis, and operating EBITDA grew by 33.5% year-on-year. The growth was primarily driven by our continuous focus around digital service offerings across selected industry verticals. Niraj, our Chief Operating Officer and Chief Financial Officer will share the detailed financials on these verticals. Also, I'd like to highlight here that recently our subsidiary, 360 logic testing services has completed the acquisition of Chennai-based company, Terafast Networks, an IT consulting service provider with nearly two decades of experience in cloud engineering solutions. We provide a wide range of technology service offerings such as cloud, containerization, DevOps, virtualization services to various industry verticals. Cloud and associated services are growing in size and potential, especially with many organizations moving from premises-based setups to cloud-based services. Enterprise Cloud is an essential component of our digital transformation offering, and this acquisition will strengthen our capabilities. The target market for Saksoft has been customers whose revenue is in the range of USD 200 million to USD 2 billion, and this segment is witnessing a good growth of digital and cloud adoption. Legacy modernization and moving applications from data centers to the cloud, rearchitecting the applications for cloud readiness are significant areas in which the Terafast team will be able to hit the ground right away in the larger Saksoft customer base. Currently, Saksoft has been witnessing good demand. Whilst there has been an odd client request to reduce the team size, in general, the demand scenario has been good. We have been able to add new clients and in addition to increasing the wallet share from the existing customers. Contribution from top 20 accounts and USD 0.5 million plus accounts is growing quarter-on-quarter. On the resource challenge front, Saksoft will be no different scenario from the peers. What differentiates us is that we continue to work on the hybrid mode and continue to offer the required flexibility to our resources whilst ensuring the productivity is not impacted. The average cost of hiring resources will definitely increase while the attrition has slightly softened. Further, I would like to add that we have a healthy cash and cash equivalents of INR 119 crores. And our return on capital employed stood at 28.5% in the first half FY '23. We will continue to reward our stakeholders with a healthy dividend. Our dividend track record over the last 5 years is a testament to our policy of rewarding the shareholders. In the meeting held on 10th November, the Board of Directors declared an interim dividend of INR 0.35 per equity share, which is 35% of sales value of INR 1 each for the financial year '22/'23. We are confident to achieve 25% revenue growth in FY '23, thanks to a unique combination of Inch Wide Mile Deep and String of Pearls strategy. We will continue to explore the inorganic growth, which will further strengthen Saksoft business model. Despite several global macroeconomic industry challenges, we are swiftly moving towards our vision to become a $100 million company by '25 with a mix of organic and inorganic growth. We are confident that the operating model, which we are in is yielding and will continue to yield results in the future. The selected and trusted verticals in which we are present and the well-thought strategy from a long-term perspective. Our teams and team structure are being agile and capable makes us more confident that we would be able to achieve our goal. I would now hand over the floor to Niraj to take us through the financial.

Thank you, Aditya. Thank you, everyone, for taking the time in joining our H1 FY '23 earnings call today. I will now go over the financial performance for the quarter 2 and for the first half year of FY '23. To start with on the revenue side. The quarter 2 FY '23 revenues were at INR 163.84 crores as compared to INR 114.73 crores in quarter 2 FY '22 and INR 148.02 crores in the previous quarter FY '23, which registered a growth of 42.8% year-on-year and 10.7% quarter-on-quarter. For the first half of FY '23, the revenue stood at INR 311.87 crores as compared to INR 216.87 crores in the first half of FY '22, witnessing a growth of 43.8%. Now looking at the operating EBITDA. The quarter 2 FY '23 operating EBITDA was at INR 25.73 crores as compared to INR 19.27 crores in quarter 2 FY '22 and INR 22.47 crores in quarter 1 of FY '23, registering a growth of 33.5% on a year-on-year basis and a 14.5% growth on a quarter-on-quarter basis. The operating EBITDA margin for the quarter stood at 15.7% as compared to 16.8% in quarter 2 of FY '22 and 15.2% in FY '23. The improvement in EBITDA margins in the current quarter as against the quarter 1 is a result of the softened attrition and improved offshore revenues. For the first half of FY '23, the operating EBITDA stood at INR 48.21 crores, registering a healthy growth of 38.5% year-on-year. During the current quarter, despite the challenging environment, we are able to sustain a double-digit margin growth. Now coming to the profit after tax. The quarter 2 FY '23 profit after tax stood at INR 19.32 crores as compared to INR 13.09 crores in quarter 2 FY '22 and INR 17.8 crores in quarter 1 FY '23, registering a growth of 47.6% year-on-year and 8.5% quarter-on-quarter. The first half of FY '23 profit after tax stood at INR 37.13 crores witnessing a growth of 20.6% year-on-year. Our earnings per share stood at INR 3.71 for the first half of FY '23 as compared to INR 3.09 per share of H1 FY '22, registering a growth of 20.6% year-on-year. Please do note that the EPS in the current quarter and all the comparative periods have been restated to give effect to the share split, such that the equity shares having face value of INR 10 fully paid up were subdivided into 10 equity shares, having face value of INR 1 each fully paid up with effect from 26 September 2022, which was the record date. The impact of currency movement on our revenues is only 0.3% for the current half year. Based on that, the pure volume-driven growth in revenues is about 43.5% as compared to the previous year. Now coming to the revenue split by geography for the first half of FY '23. The Americas contributed to 47% of our revenues. Europe contributed 27% while the remaining 26% came from Asia Pacific and other regions. The on-site and offshore revenue mix was at on-site being at 46% and offshore at 54%. As mentioned in our previous calls also, we do expect the mix to be inclined towards the offshore on an ongoing basis. The revenue split across verticals for the first half of FY '23 is as follows: Fintech and telecom and utilities contributed to about 33% and 23% of our total revenues, respectively; by transportation and logistics, retail and health care and public sector contributed 11%, 6% and 5%, respectively. One of our large customers is in the utility sector, and we are seeing increase in demand in this sector, and hence, reclassifying and consolidating the telecom and utilities vertical together. Coming to some of our customer metrics. Saksoft has 13 customers of $1 million plus revenues and nine customers whose revenue is about USD 0.5 million plus. On a quarter-on-quarter comparison basis, we have moved one customer in the current quarter from the $0.5 million category to a $1 million category and 2 new customers have been added in the $0.5 million category. The total employee count stands at 1,789 at the end of the quarter, out of which 1,624 are technical and the remaining 165 are the support staff. The utilization level of the employees, excluding trainees, stands at 86% for the current half of the year. Moving to the balance sheet. As of 30th September, our debt position stood at INR 4 crores, and cash position stood at INR 118.74 crores, which makes us as a net cash company. The improvement in cash position was mainly led by the improved margins, continued focus on collection of data, resulting in better AR collection period and cost efficiencies. For the first half of FY '23, the return on equity stood at 21.5% and the return on capital employed stood at 28.5%. That now concludes the update on the financials, and we will now open the discussion for any Q&A.

[Operator Instructions] The first question is from the line of Vaibhav Badjatya from Honesty and Integrity Investment.

And really, congratulate the management for the performance that company showed in last year, 1.5 years. Sir, just wanted to understand one thing. So if I look at the revenues over, let's say, if I compare to September 2021 quarter, so nearly INR 50 crores of additional revenue has come. So in your assessment, and I just need broad commentary, not the exact numbers. Out of the INR 50 crores, how much is from existing clients and how much is from the new clients that we have acquired?

Vaibhav, I think a general rule, and I think this would also apply here is an 80-20 rule. About 80% of that would have come from existing customer growth and 20% from new logos.

Okay. So in -- adding on to that, if you see the vertical-wise growth in technical team have seen quite a lot of growth and you have been seeing a strong kind of fintech is our focus area. So additional expense in fintech plans, if you can help us understand which areas they are going to. And secondly, if you can give us an example of one or two clients, actually, what -- who are they and how they're using our services?

So the main industry vertical is fintech, but the way we approach this industry vertical is we subclassify into sub verticals. And our strength is our knowledge of the domain of the sub-verticals. So one of the sub-verticals in which we are very strong is called reg tech, which is basically compliance to various laws, et cetera, for our customers. The other area where we are very strong is payment solutions, and one of our new logos was in this space, a company called [ Seacare ], which does money transfer. So your question was what sort of services do we offer to them. This company, we offered almost all our services from application development to data to testing and also infrastructure services. So I hope that answered your question. But on a generic basis, because our focus is so sharp, adding new logos has become now much easier than it was 2 years ago. And that's why you see a lot of momentum in our sales, you've seen a lot of momentum in our revenue.

Right. Correct. And in a broader sense, we are seeing increasingly difficult environment for the for VC -- kind of VC-funded players and a lot of fintechs are in early stage, and they rely on a lot of fund raising. So I just wanted to understand how much of our revenue is from those kind of clients, which are in early stage of their business development and is still not making profit are more relying on the funding this they can receive?

None of our clients are early stage. Okay. Having said that, we have a number of clients who are dependent on VC funding. But let me assure you that the maturity level of our fintech clients is reasonably good. So their availability of funding or cash on their balance sheet is adequate. I don't see any concern with our customers from a funding perspective. And we are very careful about this when we look at new logos. When we look at a prospect, we make sure that they are reasonably funded if they're not an enterprise. If they are a startup, very unlikely we will be chasing them. Okay.

[Operator Instructions] The next question is from the line of Hiloni from Pi Square Investments.

Congratulations on a great set of numbers. Just wanted to know what is the plan going ahead? And what is your management outlook and projections for the FY '23 and the next few quarters?

Can you just repeat that question a little slowly?

Yes. Just wanted to know the management outlook and projection for FY '23 and the next few quarters?

The guidance we had given was 25% year-on-year growth, and we are very confident that we will make that this year also. Last year, we did INR 480 crores for the full year. That's FY '21/'22. So 25% of that is what we are targeting.

Okay. Okay. And what do you think will be the key growth driver going ahead for the company?

It's more of the same. Our focus is very sharp. Our offerings are very sharp. Our target market is very well-defined. We are working in a niche, and we are trying to create more and more niches in a marketplace that is getting more and more crowded, and that's where we see our success. Our growth in the last 18 months to 24 months has been because of this strategy, and we plan to continue with that strategy. We describe this in what we call Inch Wide Mile Deep strategy.

The next question is from the line of Arvind Kumar, an individual investor.

I'm an investor in Saksoft for about 5 years. I have watched an interview on [indiscernible] I think before 2 months. In the end, you have said that never take a no, that was the question that [indiscernible]. Or you intend to sell this company? Are you going to still sell this company?

I don't know plans as of now. Give me your number, you'll be the first to know.

Sir, for your [indiscernible] and in other sections. What other sectors are you performing?

Say that again, please, Arvind?

In [indiscernible] and other sectors, it is [ 28% ] what other sectors you are performing in?

Is your question what industry is in the other...

What industry are you performing -- are you working on it?

Okay. So the -- what happens is as you grow a business, Arvind, there always will be some opportunities which will come along either through a network or through people who have passed associates with us or part customers of us. So two industry verticals come to mind in the others category. One is Adtech, the other is media. It's not a big sector for us in the others category, and our focus will always be to try and get prospects as well as new logos in our key verticals.

[Operator Instructions] The next question is from the line of Amit Jain from Monarch Networth Capital.

Aditya, congratulations on a very healthy set of numbers. Just one question on the recent acquisition of Terafast Network. So just if you can share some details about this deal. I can't find much detail about that. How much is the transaction value? And how -- what will be the impact on the financials?

Amit, you know our strategy on acquisitions. We never look at bolt-ons. We never look at adding -- doing an acquisition to add revenue because you know it better than anybody else that track record of companies that do that has been very poor. Our acquisitions are always for capability. They are never for revenue. So what we saw in this business was a very strong cloud capability. Cloud today is a very hot sector in the digital space. Every organization is wanting to move from on-premise to cloud, which involves rearchitecting applications, moving the applications, building the applications, supporting the applications on the cloud. And this company, Terafast, which is run by an IIT Madras alumni is very strong in that space. So we have acquired this business predominantly to strengthen our capabilities in the cloud space. The company also has a reasonably strong customer base. It's got a very strong customer also in the cloud space, and we want to leverage that as we go forward. So really, to answer your question in terms of numbers, it's not something that is very significant. What is significant is that it will strengthen our arsenal to grow the business at the rate that we are projecting. It's not fast.

[Operator Instructions] The next question is from the line of Diwakar Pingle.

I think just curious, Aditya, you mentioned something about making inroads into the reg tech area. I just want to understand what exactly Saksoft doing in that particular space. This got me intrigued. So I just want to understand that.

Diwakar, one of our million dollar customers -- million dollar plus customers is a company that builds compliance software for hedge funds. So as you know, in the U.S., hedge funds have to constantly adhere to changing regulations and the penalties for not following regulations are very severe. So we build software for them or we provide them assistance to build software, which helps hedge funds manage their compliance requirements.

[Operator Instructions] The next question is from the line of the Dhiraj Sachdev from Roha Asset Management.

Just wanted to know, you had decent employee engagement. What kind of headcount are you looking at? And based on the pipeline or the inquiries that you believe you will get it in terms of confirmed order book.

Like Niraj mentioned, in terms of numbers, we ended the quarter with about 1,800 plus. And right now, we are tracking at 2,000 plus, so quarter-on-quarter, growing reasonably well. I would say that considering that we are adding -- our guidance is 20% to 25% revenue growth, I would say, employee headcount growth would be in the range of 15% to 18%.

Okay. Also, when I look at the -- your domain expertise seems to be on par with a lot of new offerings across mobile cash disbursement solutions and payment gateways and big data analytics, et cetera. So ideally, your margins should be at least higher or maybe -- should not be such big difference versus larger peer set. So do we expect dealing the scope of work or the mix changing towards more qualitative complex part of your offerings to the clients? Can we expect margins to also move up over time?

The big difference between us and the bigger players in terms of margin is scale. The EBITDA difference is definitely -- scale plays a big part of it. Now as we scale up, margins will go up, for sure. But in terms of rate cards, today, I would say that the rate cards are pretty constant, whether it's a big player or a small player. I think that the place where -- the bigger guys are able to manage margins better, it is, one, with scale and the second is larger teams, which, obviously, we have because we have smaller customers. When I say smaller in terms of revenue size, our teams also with each customer are smaller than a Tier 1 player for as an example.

So do you think that you have scope for productivity increases that will improve the margins on scale?

See, our utilization is at 86%. So maybe another 1% or 2% more, that's 100 or 200 basis points more is the max we can do in terms of efficiency and productivity. So I think we're capped out in terms of productivity. The place where we can improve margins is which we haven't done in the past is go for price increases. And I think that is going to happen. So far, currency movements have helped mitigate the wage pressure increases for most Indian IT service companies. But I think going forward, rates have to go up. And there's still a fair amount of arbitrage between getting work done in India and getting work done overseas. Besides the domain knowledge and besides the value-add, the value proposition that Indian IT companies provide globally, I think there is a big gap still in the arbitration between labor costs here as well as labor costs in the U.S. So there is play there. And I think that's what's going to drive margins also as we go forward.

Okay. And just a bookkeeping question, a few of them. What is the unique client base which are active now in terms of stickiness that we can assume? Or do you think that you're deepening the relationship further, and it is not just one or two project basis and they go away?

As of today, we would have -- what would be the number of active customers? Probably 120. We would have about 120 active customers. And so far, in the last 18 months, we have lost 6 customers.

Okay. And all the noise that the background on developed markets, et cetera, slow down, you are not sensing any small pressure on the small detailed investors, retail clients of yours?

One of the reasons we are not seeing that pressure is because the news or the media that you see in terms of slowdown is always for the Fortune 100, Fortune 200 companies. Facebook lays off 11,000 people, Twitter lays off 50% of its workforce. We don't work for customers like that. We work for customers who are smaller. When I say smaller, smaller vis-a-vis Fortune 100, Fortune 200. I think the pain, whenever there's a slowdown is much more with the larger companies which have large market share. The companies that are smaller in scale than the Fortune 100 or the Fortune 200, even the Fortune 250 feel less pain in a slowdown.

Okay. And just a moment on -- in terms of deepening of the relationship, how is the movement of your clients who started small and they moved up to $1 million plus clients? Can we also have that data in the presentation?

We shared some of it that we moved two of our customers in the last quarter from 0.5 million, and we moved one customer from 0.5 million to 1 million plus. So that's a very active part of our revenue growth or revenue growth momentum, mining customers to make sure we are able to keep moving them upwards in terms of revenue. But to answer that question a little bit deeper, the way we do our prospecting is we always look at customers -- we try and categorize prospects into A, B and C. What we call A customer is a customer which is a Fortune 100 or a Fortune 200 customer. A customer where our value proposition will not have an edge over a Tier 1 player. So we stay away from them. Then there is the category C, which is too small. The IT budget is too small for us to chase. And then there is a B category, which is really where our target market is $100 million or the $200 million to the $2 billion. Now in that space, we make sure that the IT budget allows us to at least get the customer to $1 million plus. And our focus is to get the customer at any cost, start the engagement even if it's a small engagement and then keep added and move them into the $1 million. So quarter-on-quarter, you will see more and more of our customers slowly moving up to the $1 million plus.

Yes. I think that's the right strategy for growth and sustainable growth to deepen the relationship for you. Just one last thing. You've always been mentioning and vocal about $100 million in organic, et cetera. So now generating sufficient cash flow, it is all funded out of internal? I think the plan is to fund out of internal accruals.

Yes. We've never raised capital other than the initial IPO. And yes, sometimes we use debt and if a good opportunity comes where we need to use whatever cash we have, plus borrow some money, we might do that. But clearly, the idea would be to use as much of internal accruals as possible.

[Operator Instructions] There are no further questions from the participants. I now hand the conference over to the management for the closing comments.

We thank everyone for taking out time to participate in this call and for their interest in Saksoft. We believe that we are on track to receive our goal of Vision 2025. I hope we've been able to answer your queries. In case of any other queries, please reach out to us or our Investor Relations advisers, Ernst & Young. Thank you, everyone, for joining us.

Ladies and gentlemen, on behalf of Saksoft Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.