Subex Limited (532348) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q1 FY '22 Earnings Conference Call of Subex Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. G.V. Krishnakanth. Thank you, and over to you, sir.

Thank you very much. Good afternoon to everyone who have joined the earnings call for the period ended June 30, 2021. Now I would like to introduce the members of the management who are present on the call. Along with me, I have Mr. Vinod Kumar, Managing Director and CEO; Mr. Venkatraman G.S., Chief Financial Officer of the company. I would like to start the conference call by going through a 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 includes but not limited to fluctuations in earnings, our ability to successfully integrate acquisition, 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 country. So with this, I now hand over the call to Mr. Vinod Kumar to take it forward. Over to you, sir.

Thank you, Krishnakanth. Good afternoon, everyone. Thank you all for taking time for this call. I hope all of you and your families are safe and doing well. We have faced tremendous challenges in some form or other during this pandemic. After going through a very difficult period with about 150 Subexians infected and out of action for the bulk of Q1, things have definitely settled down. Most of them have recovered completely and resumed work. We also have over 60% of our teams based out in India fully vaccinated. We hope that the rest will get -- rest of the team members will also get the vaccination done and completed both the courses during the course of this quarter. As you would have seen from the results announced yesterday, we reported revenues of INR 80.6 crores, EBITDA of INR 16.2 crores and PAT of INR 13.5 crores. While traditionally, Q1 tends to be lower than the average quarterly revenues, the delays on account of project deliveries caused by pandemic negatively affected our Q1 revenues. Talking about the project delivery delays, the main reason was that 7 of our key team and managers were out of action almost for 4 to 8 weeks. Further, we could not start some new projects in certain geographies due to COVID-related lockdowns and customer nonavailability. We also had a couple of cases where the customers who recently placed the order on us wanted to migrate to HyperSense platform. And hence, we had to redo this which again took time and therefore delay in initiating the project. The good part is that things have streamlined, and starting July, deliveries are happening in full swing. Our HyperSense continued to create the momentum. And as we talk, we have 3 customers who are -- where we are -- where the HyperSense platform is under implementation. The AI Studio which is a very key component of the HyperSense is particularly generating a lot of interest as it provides customers a tool to fast track AI/ML deployment and adoption within their organization. Internally, the activity of both in Fraud Management and Revenue Assurance product on to HyperSense platform is also progressing well. We expect all upgrades and new customers going forward will be on our new HyperSense platform. Coming to the new areas. The new GTM approach of growing via distributors and channel partners have significantly increased our reach when it comes to IoT/OT security. We are focusing primarily on the critical infra and industries -- manufacturing industrial segment based on the current hype of cyber activity -- cyber threat and cyber activities that we are seeing in those segments. The implementation cycles are much faster compared to our traditional product project time lines. And post successful implementation of the initial phase, we intend to extend the footprint of coverage in every customer that we are currently engaged. For instance, we recently announced a deal in the Middle East oil and gas sector. I'm very pleased to let you know that we've already implemented and the system is in production. And that gives us an opportunity to make it -- showcase those implementations and spread the footprint to other parts of the same -- kind of same organization or different sites of the same organization. Coming to identity analytics, IDCentral. We have onboarded customers, both from Indonesia and India, the 2 markets that we are currently focused on. After the product market set, we have identified on 2 areas. One is the eKYC, followed by the transaction monitoring. These are the 2 specific aspects that we are focusing on IDCentral. And the target segments here are crypto exchanges, eWallets, lending, gaming, banks, NBFCs, brokerage trading, payment gateways, et cetera, primarily the new age e-commerce-based organizations. In India, particularly, we are seeing very good tractions and we have several POCs that we are currently driving at this point in time. Now coming to the addition of key talents. We have onboarded Asha Subramanian as the new Head of HR. She will be spearheading our talent acquisition and management and will bring her rich experience from organizations like Goibibo where she was part of the journey right from the start-up to when they achieved scale. We intend to energize the team in the new hybrid model working, which has become mainstream. We have our offices open for those who want to come and work from office. So pretty much it's a hybrid situation of working that we have at this point in time. Now even though the Q1 revenues were slightly lower than the normal trend of Q1 that we are having from years, we are confident that as we move forward, we will bring back the growth that we have set as an expectation in the previous calls. Also, as we move forward, we stand strong in our vision to make digital world trustworthy and, therefore, unlocking possibilities for all of the stakeholders. We will continue to work hard, innovate and invest in the right technologies to overcome challenges and deliver to -- deliver value to our customers, investors and Subexians. With that briefing, I would probably now hand it over to the operator to go through the questions and answers.

[Operator Instructions] The first question is from the line of [ Paras ] from Essar Capital.

So I have 2 quick questions. So first one is how many new customers have translated to revenue during Q1? And what is your quantum in top line and EBITDA? And second -- yes, yes.

Paras, can you just repeat the question? I did not get the first part of the question. Can you just repeat it, please?

Okay. Okay. So my question is how many new customers have translated to revenue during the Q1? And what is the quantum in top line and EBITDA or the percentage sharing revenue and EBITDA of the new customers in Q1?

Okay. So just based on our business that we have, we have about 75% of our business both new and old come from our existing customers because we have very -- we have almost 200 customers. So primarily we generate more revenue from the same customers. Having said that, during the course of this quarter, we have added 3 new logos. In addition to getting additional business from the existing customers, we have added 3 new logos which are net new customers additions. I don't have idea of what is a specific, let's say, revenue that added because some of these revenues will come in subsequent quarters as we start and execute on these projects. So that's -- we don't have a particular tracking of what is the new customers booking. Typically, the revenue will start coming from the subsequent quarters because this quarter, we will make the booking. And then once we have the data gathering, et cetera, and starting the project, typically, the revenues from this OI -- this quarter OI will start coming in subsequent quarters.

Okay. And from a -- continuing -- second question would be on the similar lines. So for FY '22 estimates, so how many new customers you will be onboarding? Do you have any estimate? And what will be the share of -- yes, quantum...

So let me qualify one thing. So I should apologize for that. When I talked about adding 3 new logos, this is for our core products. If you look at our new product range, which is primarily the IoT security and IDCentral, then all the customers that we have added are our new customer, it's a SaaS-based thing. So I guess new customer addition there is -- may not be the right metric there because every customer is a new customer that we are adding. Now we do not have a measure of how many new customers that we have to add because it is a nature of how the projects and the batches available for each of the customers. But having said that, our intent is that at least we should add in our core business, if you can add anywhere close to 7 to 8 new logos, it will be a very good scenario considering the fact that it's a mature segment and there, I think it's primarily about most of the customers -- most of the operators are customers for our one range of product or another. On the new areas, it is -- it's a SaaS-based thing. And these are very, very smaller mass numbers, which we are talking about. And there probably the addition of customers will be in the hundreds. So therefore, that's again a -- not a new metric that at this point in time we are looking at adding. We are looking at a mass addition at the point -- for the new areas. And for the old areas, as I said, if you get about 7 to 8 customers, it'd be a very good situation.

Okay. And do you have any quantum of EBITDA share or revenue share for the new segments or the customers for FY 2022 estimated?

It will be on the same margin profile. So we actually take the expectation that, that our overall EBITDA on a steady-state basis will be about -- around 22% -- 20%, 22% on a steady-state basis. And we expect the same from new customers as well. They were not based on too much of a variation within new customers. Because all these are new projects. I mean from the existing customers, for example, BT is a very large customer for us. And if there is a new project now I think that margin profile will be pretty much similar to a brand-new logo that we have acquired.

And then last question. So when are the contracts signed with Telefónica and Snowflake are expected to be started?

The contracts that we have started with Telefónica, it's already -- the execution has started. Snowflake is a partnership where we are -- we have announced a partnership where we are building, we are connected. We are integrating the products, and we have started. The GTM will start very soon. So at this point in time, we are integrating both the products and some limited GTMs have happened, but you expect the GTMs to happen in the subsequent months when the integration of the 2 products are completed.

Okay. Telefónica's revenue has been reflected in the Q1?

Some part of the revenue. These are projects, very large projects. We have -- these are multiple country projects. So one country we have started, and I would want to believe that some small revenue from those products. It's a multi -- it's a project that is running into multiple countries. In one country, we have started the project in quarter 1.

[Operator Instructions] The next question is from the line of Nilesh Shah from Envision Capital.

Congratulations to the team for the journey so far. Vinod, my question is around given our performance for the first quarter and given that we're expecting double-digit growth for this financial year, are we confident about our growth for the next 3 quarters given that now the run rate, in a way, what we need to achieve our guidance or expectation goes up quite significantly. I mean just very ballpark calculation suggests that we'll have to grow 18% year-on-year for the next 3 quarters to basically even achieve a very low double-digit kind of a growth rate. And if I were to kind of look at the order backlog, which is there of about $43 million, $44 million, which is to be executed over the next 12 months and pro-rated for 3 quarters even then the ask goes up quite substantially versus the kind of order backlog that we have. So basically, I just want to understand if our confidence in still being able to register a double-digit growth rate for the financial year, does that still hold?

So the answer is, yes, we're still holding that double-digit growth. And talking about the backlog billings, our plan is that by the end of quarter 2, that is by end of September, we will have all the backlog that is required for us to double digit -- to achieve that double-digit growth. Subsequently, our focus will have to shift to the execution of this contract. So we'll have also built a capacity that is required to drive additional revenues that is required for us to get to that growth level. So based on the current situation backlog that we had in Q1 and what we expect to have in Q2, we will be in a comfortable position with the backlog to drive the double-digit revenue growth that we had referred to, Nilesh.

Great. The second question which I have is around -- this quarter, we've experienced a sharp increase in our employee cost, and this is notwithstanding the fact that we've had some write-back in provision for the sales commissions and all of that. So I just have 2 questions. One is, why such a big increase in employee cost for this quarter? And I'm comparing this on a year-on-year basis. And the second is that given that this is the start of the financial year, this is the first quarter, how come we have provisions left which have to be written back. I presume that in the first quarter of the financial year, you would not have excess provisions on that front. So I just wanted to understand from an accounting point of view as well.

Sure. So let me answer the first one, and then I'll hand it over to Venky to address that reversal part. With respect to the addition of the team, this has been done primarily, as I told you, to increase the capacity so that we can drive higher quarterly revenues. You know that we have -- as per the new accounting regulation, we need to -- the revenue recognition is based on the POC and the percentage completion of the project, which again have a bearing on how many resources are there for us to deliver this backlog. So considering the fact that we have to drive higher quarterly revenues to get to the growth that we are expecting, we have to add more capacity to delivery teams. So this is one part. The significant part of the addition has gone to the delivery side. We also have had some addition into the new areas where we are scaling up, particularly in the sales and marketing areas for IoT and OT security. And that, again, is coming in -- I mean, this addition has happened in the sales and business backlog in North America, Middle East and Europe. So therefore, that again contributed into the increased employee cost. Venky, you want to take that query on the reversals, Venky? Hello, Venky, we are not hearing you.

Nilesh, the reason for the higher reversal in the current quarter is because -- we do the true-up for the financial year, last financial year payouts in terms of what is actual commission payouts in the first quarter. While a lot of it is estimated end of the quarter, but there are some portions of the components of the incentive payouts, which is linked to a number of other factors, which is not completely -- accurately available as we close the year. So those 2 have happened in the current quarter, and that has led to the reversal which you've seen in the current quarter. Those are not related to the current quarter. These are some parts relating to the last financial year quarter versus current quarter.

So Venky, would this kind of even go on in the future? Or is it like kind of [ coming through a ] learning curve, as you know, where we would be able to reasonably accurately be able to kind of, in a way, ensure that on a every quarterly basis, we have the right employee expenses? Or this is something which will basically continue even going forward?

No, no. It will -- see, there will be some bit of reversals, which will be there depending on how the provisions come. Because if you look at in our business, unlike a typical [ senses ] model, a lot of our sales commissions are payable -- people have the ability to earn those commissions through the year, which means somebody may fix a target for the quarter, and then they catch up in the next quarter, they have the ability to earn that commission [indiscernible] the subsequent quarter if they catch up in [indiscernible]. Because the nature of the business is such that you have orders which are bulky and they come in as and when these closures happen. So -- and we do provide the opportunity for people to be earn -- to earn them back even as the year progresses. To the extent, we do pull back provisions depending on how we see visibility of closures which are happening for the sales guys. So that leads to a little bit of such plus/minuses happening. But yes, we are also continuously looking at our processes to see how do we improve this further and keep [indiscernible] to the minimum.

Yes. Because Venky, what happens is if I just look at the reversals in provisions for the last 2 quarters, March and June, they add up close to about INR 13 crores, which on a revenue base of INR 373 crores that works out to kind of in excess of 3%, 3.5% of the revenues. I mean that's quite significant because it has some implications in terms of margins and it just creates volatility in the margin. So I think as investors, it becomes very difficult for us to, every quarter kind of look at and track how the margins are moving. So maybe as a suggestion that if you can do something about this and...

That's a valid observation and something which we are aware of, and we are working to improve that further as well.

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

Sir, the question is we have shared the contract backlog, which is at $111 million and 12 months being $42 million, and Nilesh bhai also alluded to the fact that now the ask rate is higher, which is reflected partly in the backlog of orders. The question is, sir, even the total contracted backlog also is not increasing. So the question is, is there a traction that we are seeing in the new products that we've launched, Horizon -- Horizon 2 and 3? What are the typical the addressable -- the typical ticket size that we are getting because it's not reflecting even in the total order backlog. And two, you say that the implementation cycle is likely shorter. So if you can give us some sense of what are the -- or giving an example of oil and gas contract that we had. How are we getting it? And you also mentioned it's ARR-based. So if you can elaborate a bit there. And in that context, our expectations of $20 million from the new revenue, new Horizon products. Does it look on track or maybe we'll have a surprise on the upside?

Yes. So first on the contracted backlog, I think we had a reasonable quarter 1 when it comes from a order booking perspective. It was -- it is significantly higher than the normal quarter 1 that if I look at the last 3, 4 years. The quarter 1 booking has been probably one of the best quarter 1s that we have from an order booking perspective. But having said that, again [indiscernible] quarter 2 is sort of -- sorry, quarter 3 and quarter 4, there is a significant skew upwards when it comes to order booking as well. So -- and so it is a good [indiscernible] we have replenished all the things that we'll have used up. And as I said, by the end of quarter 2, we expect to have all the backlog that is required for us to drive revenues for this financial year. Now coming back to your question on the Horizon 2 and Horizon 3. Now security -- there are 2 products, security and security product, which is the Horizon 2 and Horizon 3 is kind of the identity analytics. If you look at the identity analytics, the average MRC that we're talking about for eKYC will be around $500 to $1,000, I'm just talking about average. There's a broad base on a large set of customers. The average will be about $500 to $100 -- $1,000 per month, and that will go up to $5,000 per month once we add the transaction monitoring. So those are -- that's where -- but the number of customers will be several. I mean even if you look at customers [indiscernible] we have an addressable market of 700 to 800 customers, but here the addressable market will be in thousands, right? And maybe in India itself, if you could take that, then we have at least 100,000 customers that will require identity analytics. When it comes to our IoT security, there are 2 sectors that we are taking. One is the enterprise segment, which is, again, the SaaS-based things, which is -- which we are expecting an average revenue of about $7,500 to $10,000 per month is the average revenue that we're expecting from one site, one location. Again, this can vary differently based on the number of elements that we are covering. So that's one segment of recovery. And then we have the large governmental and the large enterprise segment where it will be in multimillion dollars. So currently, where we are, we are addressing, I mean, in the some of the contracts that we have won are large conglomerates or large MNCs which have got multiple sites, multiple country installations. And currently our focus is to implement the first site, like I mentioned in the Middle East, oil and gas situation. We have another -- take another example, we have implemented manufacturing in [indiscernible] and that's a global company, and we will now expand it to the next country. So I guess that the new areas of ticket size and MRC is the -- you get the range of MRC, but it is -- a number of customers are significantly more catered through both channels, distributors and things like that. So the business is very different. But there is a part of the business which appeals to large enterprises [indiscernible] similar to the telcos, et cetera. And there, probably the profile will be something similar to what we are into our core area. But the real growth in the number of customers we are expecting from smaller customers paying smaller margins, but a large number of ones similar to the SaaS-based companies that are used to. So to answer your question on the $15 million to $20 million ARR, we're still confident based on the current thing that we will get.

Okay, sir. And sir, the question -- second part of the question is, you mentioned EBITDA margin more in the range of 2022, but that is more of a Q1, whereas annual last 2 years' average has been more like 25%, 26%. So are we being conservative there? Or based on the cost that we have a kind of upfronted meaning on the employee side. And also maybe expected costs that might incur -- again as we start traveling we are kind of guiding that range of margin. And also...

It is primarily the travel and the marketing, which we expect that will slowly pick up because last year, we did not have those 2 expenses. So marketing for sure, has started picking up and traveling, we expect that from the December time. I mean, Europe and U.S., people have already started traveling. I guess the travel will start picking up. So once we look -- that's why I mentioned the steady state will be around 22%.

And another point is the investments in the newer areas continue, right? I think those will take some time to ramp up. So that will also impact the overall margin because we're talking of continued margin here in 2022.

That's correct. So when you talk about that margin we have factored in the investments that we are currently planned for the new areas as well.

Sure. Sure. And sir, if you can share also maybe if not now or late in the call, total contracted backlog as of this year, last year this time, that will be helpful.

Okay.

We don't have that readily right now. We'll come back to you because you've been originally reporting Y numbers and we've been away from that to -- start presenting the total contract value numbers. So to -- we'll have to come back to you separately on what it was last year.

So just while we were not reporting that OI backlog, but if you look at the comparable number, we talked about the OI backlog last year. It was around -- we have almost doubled from whatever it was last year. So from a Q1 OI perspective. But again, I don't want to confuse with giving another number, but -- so we -- the backlog is much more meaningful. So therefore, we have started reporting in the backlog.

[Operator Instructions] The next question is from the line of V.P. Rajesh from Banyan Capital.

Just a question on the Horizon 2 and Horizon 3 products. What is our MRR or [indiscernible] at the end of the June quarter?

So Rajesh, we drove overall revenue of about $0.5 million, just under $0.5 million is what we drove. We have -- I don't have the breakup from an ARR, MRR perspective, but I think bulk of the revenues come from that range, but about $0.5 million is what we drove from that [indiscernible] Q1, Rajesh.

So [ half ], right? This will not be...

I'm sorry to interrupt you, Mr. Rajesh. Your voice is breaking up. So we cannot hear you very clearly.

Is it [indiscernible]?

No, sir. It is still breaking. I would just request you to please check your phone line and rejoin the queue. In the meanwhile, we'll move to the next question, which is from the line of [ Deepak Chitale from Ray Capital ].

Would management like to give any insight on the revenue expansion for FY '23. I know the management has guided in teens for this year. But any insight for FY '23?

No. I think at this point in time, we do not want to give anything because our focus is on producing [indiscernible] growth that we have suggested. But I guess, overall, as I said, both on the -- particularly on the -- on the new areas, we want to see that within the 2 years' time frame, we'll definitely well be up to this $15 million, $20 million ARR that we're talking about.

[Operator Instructions] We'll move to the next question, which is from the line of [ Ashit Cote ], an Individual Investor.

I have 2 questions. One is with regards to the subsidiaries. You have listed approximately around 7, 8 subsidiaries. Can we get the breakup -- performance breakup of which subsidiaries and how much they are actually contributing on the revenue as well as the profitability? That is one. Second, earlier also I had asked for like each day new area we are venturing into, who are the top players in the same field world -- in the world as well as within India?

Okay. So Ashit, on the subsidiary performance, I think we have a number of subsidiaries. And of this Subex U.K. is the largest one among the subsidiaries. Other ones are smaller ones. So a significant portion of our business comes from the LLPs, and that is in the part of the consolidated numbers which we report. And if you look at our -- if you look at our annual report for last year, we will have the breakup performance of the subsidiaries' performance. So on a quarterly basis, we don't disclose how each of these subsidiaries performed because it is a lot of work to compile and present it at that level. So on an annual basis, you can look out our annual report, and you can have that information.

Possibly, I did not figure out.

Okay. So when -- coming to the competition when it comes to IoT/OT security, do you have -- particularly on the OT security, we have 2 companies. One is Clarity. And another company is Nozomi, both of them are U.S.-based organizations that are competing with us globally. We do not have any local competition per se. When it comes to the identity analytics, there are not -- again, there are a lot of solutions, but which is broadly in the space, smaller competition doing some fraud management, things like that. But specifically, offering eKYC and the transaction monitoring, we don't see that asset. But we are expecting this is early range. As we start getting it, we will definitely find some competition, and we will report that. At this point in time, I cannot name one global competitor that we have around these product lines at this point in time.

Hello? Within India, sir.

Within India, we don't have anybody from -- I mean these competitors play in Indian market as well, but we don't have anybody from India -- no Indian company is competing with us. That's the point that I was trying to make. These are global companies, which will compete globally. Like we are competing globally, these companies are also competing globally.

Infotech, their blog, and I think they are already into cybersecurity. So I was wondering.