Subex Limited (532348) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Subex Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. G. V. Krishnakanth, Company Secretary. Thank you, and over to you, sir.

Thank you very much. Good morning to everyone who have joined the earnings call for the period ended December 31, 2020. Now I would like to introduce the members of the management who are present for the call. Along with me, I have Mr. Vinod Kumar, Managing Director and CEO; and Mr. Venkatraman G.S., Chief Financial Officer of the company. I would like to start the conference call by going through the safe harbor clause. Certain statements in this call concerning our future growth prospects are forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. The risks and uncertainties relating to these statements include, but not limited to fluctuations in earnings, our ability to successfully integrate acquisitions, competition in our area of business, client concentration, liability for damages in our contracts, withdrawal of tax incentives, political instability, unauthorized use of our intellectual property and general economic conditions affecting our industry. So with this, I now hand over the call to Mr. Vinod Kumar to take it forward. Over to you, sir.

Good morning, everyone. It's great to have you all in the call today and hope all of you are doing well. I'm very pleased to inform you that at this point in time, all Subexians are sound and safe. All those have -- who have been affected by COVID has -- have completely recovered, and they are back to work. As you would have seen from the results, we had a good third quarter. The revenue for FY '21 quarter 3 was at INR 93.9 crores. The EBITDA stood at INR 20.3 crores and PAT at INR 8.5 crores. The 9-month revenue at INR 275.9 crores, 6% more than that of last year. A few years back, we were in a very bad situation with large [ debts ] and several operational challenges. As we stand today, we can confidently say that we have completely turned around. Operationally and financially, we are doing well with significant progress in every metric. We have also constantly invested in new areas in spite of some of the challenges that were posed by pandemic. We are quite confident that some of these new areas will be real winners. Further, our cash position has significantly improved, and we have sufficient capital for investing behind our growth. Taking all these into consideration, the Board decided to declare an interim dividend of 10%. From an operations perspective, we have moved to our new office earlier this year, new corporate -- it's a corporate office in Bangalore. It's an open office with a lot of emphasis on collaboration. It's also smaller than our earlier one, considering the fact that several of our team members are expected to work remotely on an ongoing basis. From a project delivery perspective, we continue to face some difficulties due to the challenges of remotely integrating the customer environment. We have to integrate with multiple systems within the customer environment as part of our project delivery, and it's a big departure from the set norm of key members being on-site for their integration activities. This is resulting in more time for implementation, and we are adding capacity so that we can take up additional projects that we have won recently. We hope to continue this activity of increasing the capacity during the course of this quarter. And by the end of this year, that is, by March, we expect to have the full capacity so that we can address the -- most of the new contracts that we have secured as [indiscernible] from September onwards. On the new business acquisition front, around the core, engagements have resumed pretty much full swing in APAC and Middle East. Other regions are slower, but much better than what it was in the earlier quarters. Around the new areas on IoT, we have started focusing on the manufacturing sector. And last quarter, we have secured 4 new customers, all in the manufacturing segment. IDCentral, which is the identity analytics solution, which we have launched in Indonesia, we have the first customer onboarded, and we expect that several other customers who are on the POC phase will get converted during the course of this quarter. On capacity management, the solution that we have around our 5C, we have secured the first customer and implementation will start during the course of this quarter. We are also very excited with the NGP platform that -- the Next Generation Platform that is -- that we are building. And it's all set to launch in the first quarter of next financial year. This is a platform which we think will revolutionize the way that telcos operate, particularly in the OSS and BSS systems. This is a cloud-native, API-based application, which will enable the operators to quickly launch services on top of this platform. In line with the capabilities of the platform, all our existing products also will migrate to this platform as and when the platform gets ready by the first quarter of next year. I'm talking about next financial year, that is, in April to June this year. Also, in line with the fact that we have now a platform, we have also brought in a solution team, which is headed by a key leader, which has come on board in January. And the idea is that around our NGP platform, we will create more solutions so that it will be -- we'll be able to boost the customers with a bouquet of solutions on top of the platform. Some of the solutions that are planned are campaign management and other 5G-based solutions. Now overall, the -- as we stand today, we are quite bullish, and we expect that the OI, the order intake, during the course of this quarter will come back to the pre-pandemic levels. I also want to thank you for all your continued support and the confidence reposed. With that, probably, we will take -- we will open the floor for questions and then if there are any specific clarifications for both from a financial standpoint, operational standpoint between me and Venky, who's our CFO, we will take those questions.

[Operator Instructions] The first question is from the line of Kranthi from WealthMills Securities.

Congratulations to the team at Subex for the good set of numbers and also dividend, which encourages the investors for their faith in Subex. Just would like to ask, as India is setting towards the 5G spectrum and the new technology, how Subex is positioned to take the advantage of this new technology? And how the next coming quarters as the normalcy is coming back across the globe with access into a couple of regions, how Subex is taking the advantage of the coming quarters? Just would like to know.

Yes. Thank you for that. So first, let me take the second question first. Now as I told you, we have seen an increase and we have started getting securing orders, some of them very large contracts. This is predominantly from the APAC and Middle East region, where, I mean, activities have pretty much come back to the pre-COVID level. And we expect some of these things to start executing in this quarter. Obviously, a challenge is how do we execute some of these contracts because these are not kind of low-end services that we are looking at. We are looking at integrating to the core systems and doing this integrations remotely for discussing there's too much to and fro, and that's the challenge that we have. But we will -- we are making progress, and we are adding capacity so that we can pick up more work. So we -- this should result in higher revenues in the coming quarters by and large from these regions. In Europe and others, we are still not yet to see that kind of interest because most of them are in a difficult situation. Most of the operators have gone back into the lockdown kind of mode. But still, I think there are regions which are very promising, and we have already started securing orders. And therefore, we are quite bullish on how those things will pan out. With respect to the 5G, as I have mentioned, we have 2 solutions that are catering directly to the 5G: one is with respect to this capacity management, which I mentioned we won the first deal; second is the solutions that we are building around our platforms with a specific focus on 5G. There are many solutions that we are looking at, but I think we'll start with 1 or 2, and based on the engagements, we will come with a lot more solutions. Now what is also enabling us to come back -- come to launch many solutions is a new platform because the new platform is very loosely couple cloud-native, which will enable us to -- it's a componentized platform. So it is easy for us to bring solutions much faster to the market. We have been in the -- it has been in the work for the last 2 years, and we will launch that in April. So all these things should result us in engaging much deeper and broader with our customer base, and we are expecting very good results to come out of these initiatives.

Great to hear. Just want to know, this is my final question, how do you envisage Subex in the next couple of years? Okay, what is your vision? How do you want to position Subex as an organization in the next couple of years? What is your vision?

Look, I think we were in -- so far, we are looking at a small player in the telco space around fraud and RA. But our vision is to emerge as a leader when it comes to digital trust solutions in a multi-vertical environment. That's our vision. And it's a very large space from a market standpoint and from a business standpoint. And if you execute well, it will take Subex to a completely new level altogether. And also from a -- purely from a societal point of view, you know that with digitization, it involves a lot of issues with the trust and security. So we will also be contributing as an organization to making this whole digital a very trusty and secure one.

The next question is from the line of Amish Kanani from JM Financial.

Sir, congrats on dividend. And 2 questions from my side. Sir, if you can give us some sense of what is the order book size or the new order wins, which can give us some sense of how the growth is panning out? Because this quarter looks a bit softer vis-à-vis what other companies are kind of announcing the results. Of course, we are in a different space. But just to give us some sense of -- and our fourth quarter normally is strong because of some royalty income that I have seen -- observed in the last quarter -- last year this quarter, fourth quarter. So if you can give us some sense of growth in a short to medium term vis-à-vis the order intake and the order size that we have? And second, if you can update us on the tie-up that we have had or some understanding of MoU with Tech Mahindra, what is happening on that space? And is it on the same space where this OSS/BSS cloud-native, that reference that you had made, the New Generation Platform that you were talking, is it the same space or it's slightly different? If you can give some sense there, that will be helpful.

Okay. All right. So let me give you some flavor with respect to the order intake that we had. So in the H1, that is, quarter 1 and quarter 2 put together, we closed about $13 million to $13.5 million. Now from September to now, we have closed $15 million. And we expect in Q4 to be better than Q3. So I guess that order intake has come back and, as I mentioned, it has come back to the pre-COVID level and that's going well. What is challenging at this point in time is the execution because we are not able to send the team to the customer base, customer location. And typically, we don't have customer -- our team stationed like some of the services companies on an ongoing basis. So the modus operandi was that whenever we get a project, our team will land up there, and they will do the data gathering, integration, come back and then with a larger team work and deliver that. So that has resulted in us taking way too time to figuring out the integration, et cetera. Now we are ready to send the -- send the team to the customer base where customers are not happy because of local considerations and the quarantine measures and things like that. But we are working through that. So I guess that by this quarter, with the enhanced capacity that we have here, and we also started hiring some people locally, we will be able to bring that delivery capacity so that we can execute some of these orders. So from an order intake standpoint, it has been a very strong quarter, and we expect Q4 to be even better than what we have in Q3. Now the second aspect with respect to the partnership that we have. The partnership that we have with Tech Mahindra is primarily around the blockchain area, not with respect to the augmented analytics platform that we have. And that we have started. We have just -- while the teams are working together in creating the point of view -- the POVs around the partner management and one area of the interconnect, fraud management. These are the 2 areas that we are working. We are working in the telco space, but it's on the blockchain area, not on the augmented analytics platform which we have. Just to clarify that, the augmented analytics platform is going to be a product -- a new product offering that we are going to take to our existing telco customer base to start with. And that is going to augment or work or complement some of the large data warehouses that the customers have. So this will help them to do AI and analytics much more easily than what it is today. And this is primarily for the advantage that we are providing to the telcos.

And sir, does this fall in this Horizon 2 or Horizon 3? And if you can give us some sense of how is this Horizon 2, Horizon 3 strategy panning out?

This is coming in the Horizon 1 because it's on the core products, and it's our existing team and -- I mean you could call that as an extension to our Horizon 1 product offering. So there's a clear revenue expectation starting next year from this product.

So it also will help us move to SaaS-based offerings in this space. But obviously, it's a question of how ready the telcos are in -- they want to move to that environment. But once we start launching this, it will give us the ability to provide this broader core offerings even on a SaaS basis.

Okay. And sir, last question on -- if you can just give us some flavor of Horizon 2, Horizon 3 strategy in terms of either some -- how is the traction and stuff like that or the breakup of, say, turnover or order book in, say, 9 months or...

Look, I think we have not gotten there where we can start reporting revenues. But I guess, as I mentioned, in IoT, we have secured 4 new manufacturing clients in the course of last quarter. These are SaaS-based engagements. So engagements will start slowly. But as we start the number of elements covered and the number of plants that we are covering, it will grow. But this was more kind of a validation because we have to do some course correction post the pandemic because we are focused on some of the sectors like oil and gas and smart cities and others, which has taken a backseat. And so therefore, we had to course correct during the COVID and manufacturing is where there's a lot of activity that we are happening, and we have just focused back and now our focus is back on manufacturing with respect to the IoT security. IDCentral, as I mentioned, is quite promising, and we have just 1 country that we are covering, in Indonesia. We have got a coverage of excess of 75% of the population. We have secured the first customers. Again, on a SaaS basis, it can grow very, very quickly. And expectation is that we will close this year with a very good monthly recurring rate of about -- having securing 4, 5 customers. And we are expecting that the number of customers to be added about 3 or 4 customers per month going forward from now onwards. So IDCentral has also gone very well. CrunchMetrics is the only thing where we are struggling a bit because we have had some POCs, but I think the conversion is taking much more. So we are taking a view as to what has to be done with CrunchMetrics. But off the Horizon 2, Horizon 3, we have 4 areas. IoT security, okay, doing well. IDCentral, again, emerging as a winner. Analytics as a SaaS, that's a rocking site, that is also quite stable, and we have customers there. Only one which we are having a bit of a challenge is on the CrunchMetrics where we have not been able to convert POCs into commercial agreement at the rate what we want. Again, it's a SaaS agreement. So we are looking at what needs to be done there. So that's an update on the 4 products on Horizon 2 and Horizon 3.

[Operator Instructions] The next question is from the line of Rahul Jain from Dolat Capital.

Congratulations on the strong execution. Just 2 questions from my side. Firstly, what percentage of revenue you are seeing getting impacted due to supply-side factors which you just alluded, especially on the on-site or near-shore market?

So I would say that this -- we are -- typically, we used to complete a project in a 9 months' time. 9 months is the average completion cycle that we have on a project. Now we are seeing that it is getting extended by about 3, 4 months more because we are not able to get the responses back because please understand the telcos environment also everything is not documented, et cetera. So we used to get on to the site and figure it out how things are. But it's a big change in both sites, particularly from the customer environment site. So I would say that it's taking 9-month average cycle for project completion. It is getting about 30%, 40% more. Our expectation is that it will get streamlined because I think customers are also taking the necessary corrective actions because most of their projects, they are forced to operate this way, but that's where we are currently. We hope that we will make progress during the course of this quarter or maybe early next quarter from both efforts from our end and customer end.

Right. But are we getting adequately compensated for these? Or these are resulting into lower on-site utilization?

So we didn't have any on-site utilization per se because we used to go -- it's a part of our project. But to answer your question, we have started factoring this. And in the new contracts that we have signed, both from a timing perspective and effort perspective, we have factored into the cost. And this also is [ accepted ] because customers also understand that it is taking more time. They are not ready even when we are ready. So I guess, both from a timing perspective and effort perspective, that has been factored into our new agreements that we are engaged with the customers. Some of the old ones we are taking on a case-to-case basis, we are taking that with the customer and then figuring out what needs to be done.

Okay. So basically, what you are essentially saying is that it would mean that the tenure of the deal increases but there would be no financial implication as such?

By and large, yes.

Minimal.

Okay. Secondly, how are you seeing this investment by telcos and the 5G shaping up in terms of -- any flavor you could get in terms of timeline, scale, size, anything? Because recently, there was a deal that was announced by one of the Tier 1 players and the deal size was $50 million. And the initial expectation by most of the experts was that these could be huge opportunities. So are these -- are you seeing a trend where there are all-size kind of investment which telcos are doing in 5G? What is the median of any benchmark you want to set there? And how we play into that? I mean for every $100 spent, where do you think we would feature from our own opportunity perspective?

Okay. First, on the 5G investments for the telco side, I think globally, we are saying that the investment plan is intact and they have started investing. And different regions are investing in different -- the pace is different, but I think the investment plan is on track, and they are investing. Now with respect to our business, I just wanted to clearly clarify that we are in the product business where we have products that we try to implement into our customer base. So it's not like any -- let's say, any services that is offered by the customer we go after that. We have products and we implement those products. So in that front, we have a couple of products that we have around 5G: one is around the capacity management, second is on the security, third is the solutions that we are building around some of the areas like campaign, et cetera. Now whenever these solutions are -- these solutions will be required by the customers at a particular phase. It may not be in Phase 1 because Phase 1, the whole rollout will be around deployment, testing of the gears, of the hardware on the network equipments. We don't play in that space. We play more in the operation -- in the business support system, where once they have implemented, once they have launched the service to the market, there is a need to build those services, manage those services, monitor those services. That's when we come in. Obviously, we have discussions with customers so that once they launch the product, how do you manage that, but it will come a bit later than -- later -- after the rollout has happened. So some of the things that we are talking about is primarily around support that is required on rollout of the network equipments that is happening at this point in time. So the OSS/BSS -- or rather the BSS, the rollout will happen once the gears are in place, which probably, my view is that based on a large scale [ deployment ], I would say, need for the BSS will start in about 9 to 10 months' time from now.

The next question is from the line of V.P. Rajesh from Banyan Capital.

Congrats on the couple of fronts, the fact that most of the Subexians have recovered from COVID and now you have reinstated dividends. So that's wonderful. My first question is new contracts that you talked about on IoT, are they coming through Telefónica or are those direct wins?

So these have not come through that partner, but it has come through other partners. There are other partners that we have in regions -- various regions, and we are only taking through partners. Most of our deals are through partners, Rajesh. So it has not come from that particular partner, but it has come through some other partners in APAC and South America.

Okay. Wonderful. And my second question is regarding the backlog, the order intake has been very strong in the quarter gone by and expected to be strong in this quarter. What was the backlog from Horizon 2 and Horizon 3 products at the end of the quarter?

So Horizon 2 and Horizon 3, the backlog is around -- about $1.5 million to $2 million, Rajesh. But we were talking about -- most of the new -- the wins -- the big wins that we are talking about, when I talked about the order intake, it's come from our core areas, not just from the new areas. The new areas are SaaS-based business. So it's not the order intake. We don't even have the order intake. We have a rate, and based on the usage, [ they build ]. So I don't -- we're not even managing those businesses as order intake-based businesses. It's kind of monthly rate -- monthly recurring rate that we are looking at like any SaaS business, Rajesh. So in the new areas, the order intake doesn't make -- the metric is not -- [ it's 11 won. ] But when I'm talking about the -- from September, we have won about $15 million, that's one of a core areas of the telcos what we have won.

Understood. So I guess the better metric to say on the Horizon 2 and 3 is what is our ARR?

Correct. Correct.

MRR. ARR.

MRR. ARR. So I think we probably will be in a better position to, let's say, let you know on what is the ARR that we will end with as we end the year. But we are quite hopeful that we will come with a sizable, let's say, MRR. monthly run rate or ARR as we close this year, Rajesh, based on some of these contracts.

The next question is from the line of Dipesh from Emkay Global.

I have a couple of questions. I think first about the order intake things which you earlier alluded to. So you referred to only license-related revenue and order intake or it is across the business is what you indicated about $13 million and [ $30 million ] in Q3? Second question is, how you expect that mix to change for us going forward between services, support and license-related things? Third thing is, is it possible for you to provide some more slice and dice across revenue mix, maybe different products and how you expect that trajectory to be?

Okay. So on the first question, this order intake -- the order intake is predominantly license and delivery. We club that together, license and implementation and new managed services. So predominantly, the order intake is that, support. The annuity recurring is not considered as an order intake. So therefore, it's primarily new business, which will be license implementation or new managed services that we have. So that's the first question part. Second, with respect to the -- what was the second question?

Second question, in terms of mix -- so I'm not clear, what was the specific question...

Okay. On the mix. On the mix, I think at this point in time, if you look at a quarterly revenue run rate, we have about -- $7 million to $7.5 million is where we have the managed services and annuity and the rest comes at services. That mix will change and delivery -- license and implementation will be more as we go along because if you look at the cycle that we have, most of the new contracts when we implement, first, there will be license and implementation. And once the implementation is over after maybe a duration of 9 to 12 months' time, then the support kicks in. So you'll find that the $7 million, $7.5 million, our license -- sorry, annuity, which is support and managed services, will be in the range of $7 million, $7.5 million per quarter and the rest will be the implementation services. So if we are talking about $12 million or $13 million, the rest $7 million minus that $5 million to $6 million will be well in the delivery, license and implementations. And if we increase that to $13 million, $14 million, $15 million, that increase will predominantly come from the license and implementation.

So just to be clear, let's say, in your presentation, you have mentioned bucket of service mix: managed services, support services, implemented, customization and license. When you give deal intake number, you are referring to only implementation part and managed services. Support services and others is not part of deal intake, right understanding?

So the order intake number -- Yes, you're right. So let me clarify that. So in the case of our business, support and managed services, typically, it is renewed year-on-year, okay? So when I talk about the new order intake, right, it's predominantly that component which is called as implementation -- license and implementation component and new managed services. So the existing managed services, if we are renewing it or existing annuity or support services, which is renewing, that is not coming as a part of the order intake. Am I clear?

No, no, that is fine. I understand license, and there would be follow-up support service revenue. So let's say, what would be AMC as a percentage of license or...

It's about 16%, 17%, 16% to 17% of our license will be the AMC, annual maintenance...

So that 16% to 17% is already built into when you give...

Sorry to interrupt. May I please request you to rejoin the question queue for your follow-up as we have people waiting for their turn? [Operator Instructions] The next question is from the line of [ Mahesh Jatav ], individual investor.

My question is related to the increase in employee benefit costs -- expenses and other expenses. So if you see the employee benefit expense, it has gone up by INR 3.6 crore compared to September quarter, whereas other expense has gone up by INR 1.6 crore. So what is the reason for this increase in both the costs?

Yes. So the employee expenses have gone up because we have rolled out increments to our people. So that is effective October. So you can see the impact of that. And we also had a little bit of headcount additions as you would have noticed...

Yes, 12 employees are added compared to September quarter.

So it's a combination of the salary increases and the headcount, which is leading to the employee cost going up. Other expenses, I think there is nothing very specific. I will have to look at that and come back to you. There's no very big ticket item, but anyway I'll recheck that and come back to you.

Okay. And the second question is pertaining to presentation given for the conference. In June quarter conference call, I requested for a slide on giving order intake and then paid POCs as well as free POC done in a quarter. And if it is possible for the company to share information, what we are doing in the quarter in Horizon 2 and Horizon 3? See, this will give us a visibility in which direction we are going. And if there is any problem in Horizon 2 and Horizon 3, the investor, if they have some input, they can share with the management.

Yes. So we hear you. I think, see, as Vinod was talking about earlier, I think we definitely want to start publishing financial metrics for the Horizon 2 areas. But as we were explaining earlier on, I think it's not come to a size and scale that I can...

No, what I'm saying is not the financial metric, like, how many POCs we have done, whether those were free POC or paid POCs, and what are the customer wins. All like that for Horizon 2 and Horizon 3. See, we are basically more focused on the Horizon 2 and Horizon 3 for growth of the future of the company. So whether we are going in the right direction, if we keep sharing that information with the investor on a quarterly basis, we will also get a confidence that in which direction we are going.

Sure. We'll consider -- we'll discuss this internally how practical is it to share POC level information, but we'll come back to you. We hear you. I understand your point of view. We will come back.