Subex Limited (532348) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q4 FY 2024 Earnings Conference Call of Subex Limited. [Operator Instructions] Please note that this conference is being recorded. I would 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 quarter and ended March 31, 2024. Now I'd like to introduce the members of the management who are present for this call. Along with me, I have Ms. Nisha Dutt, Managing Director and CEO; Mr. Sumit Kumar, Chief Financial Officer of the company. I would like to start the conference 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 reflect to fluctuations in earnings, our ability to successfully integrate acquisitions, competition in our areas of business, client concentration, liability for damages in our contracts, withdrawal of tax incentives, political instability and operate use of our intellectual property and general economic conditions affecting our industry. So with this, I hand over the call to Ms. Nisha Dutt to take it forward.

Thank you, G. V.. Good afternoon, everyone, and a warm welcome to Subex's investor call. As you all know, we have concluded the financial year '24. And this actually incidentally also marks my 1 year at Subex. I came in with a mission to get Subex on a growth path and transform it to a telco AI-first company. And I just want to -- I wanted to do a quick retrospective today. And I think that when I came in we were in midst of a tough year, and we had to get the transformation journey quickly. All of last year has been focused on growth, but I wanted to make sure that it is of our bottom line as well. In terms of growth, I've been able to deliver 11.1% year-on-year growth, which incidentally is the highest growth in the last decade. Actually, if you go back and look maybe in the last 15 years or so. Similar growth in Subex was last delivered when we had promoters at the helm of the mix. Bottom line focus is also back. I would say that EBITDA being positive for Q3 and Q4. I just also reinforce this somewhere in my [indiscernible] in our journey and vision of connected experiences and AI. And I believe that we are overall on the right track. During the year, I have also met several customers in person at events like BTW and WC. And one of the [indiscernible] which you see telcos are embracing technologies of AI and GenAI. We have almost belief that we are witnessing history in making with what was once just a mere concept is now finding acceptance in real use cases for telcos. We are also in line with that. We have also transformed our portfolio in the last year to be a part of this journey. And we are making necessary investments to ensure that we are well positioned to capitalize on this. And turning quickly to the business update. As I mentioned in our previous call, I'll update you usually, I update you on 3 dimensions of growth, efficiency and talent. So in terms of growth, we have achieved sufficient quarter-on-quarter growth. I would say that this is a positive trend. So I will -- due to the [indiscernible] can be much [indiscernible] I agree, but I think you would agree that the trend itself is positive right now. And we have had some strategic Tier 1 wins in quarter 4, which also includes significant AI components. So we will continue to focus on growth as we speak. I'm shifting gears to the next update on efficiency. In addition to top line growth, we are also focused on cost and we turn EBITDA positive. For Q3, Q4, we have been EBITDA positive. And we have also managed to keep our employee costs under control. But now you must have noticed that management has carried out a routine annual impairment exercise in respect to carrying goodwill. And we have made an impairment provision of INR 148 crores. This is a part of our commitment to total accounting and high governance. This is a noncash item, as you all know. And I want to assure everyone here that while we have taken that impairment, we see it in the light that we have actually delivered growth and our positive PBT of INR 14 million for the quarter. And I want to emphasize that financial health of the company is actually good with respect to cash balances being above INR 100 crores right now. The reason why we made this call is because we are trying to make significant investments required in our core portfolio to keep as -- to keep pace with fast-growing technology transformation. Now let's just talk about the talent, the third pillar of our update. We continue to retain and nurture our key talent, but we find ourselves in tough talent market. So we are being responsive in retaining key talent, but I will admit that [indiscernible] is a tough talent market. We have also arrested attrition successfully last year. So we are at what is [indiscernible] with the industry right now. And in addition to revamping the leadership, we are also focusing on having a strong mid-level management. That usually, as you would agree, is the backbone of any company. So those are the business updates. I'll quickly cover the financial results. Performance highlights for the quarter that ended on March 31, 2024, compared to the previous quarter that ended on December 31, 2023. Revenue for the quarter stood at INR [ 833 ] million as against INR 818 million for the quarter that ended on December 31. This is a growth of 4%. EBITDA for the quarter stood at INR 31 million as against INR 6 million for the previous quarter, which is EBITDA growth of about 3% quarter-on-quarter. Profit before tax and exceptional items for the quarter are at INR 14 million and against INR 24 million negative for the quarter that ended on December 31. But if you look at normalized PBT, this is positive for this quarter. Profit after tax, including exceptional items for the quarter stood at negative INR 86 million as against negative INR 49 million for the quarter that ended on December 31. And performance highlights for the year that ended on March 31 compared to the year that ended on March 31, 2023. The revenue for the year -- year ended at INR 3,097 million, that's INR 309 crores as against INR 2,787 million for the year that ended on March 31, 2023. This is the growth that I was speaking about. This is 11.1%. This is the highest ever growth in a decade. EBITDA for the year is at minus INR 157 million as against INR 307 million for the year that ended on March 31, 2023. Profit before tax and exceptional items for the quarter at negative INR 272 million as against negative INR 391 million for the year that ended on March 31, 2023. And profit after tax, including exceptional items for the year ended March 31, 2024, is at minus INR 438 million as against minus INR 152 million for the year that ended on March 31, 2023. As you will see that overall, the trajectory is right, and we are on the path to recovery here. But I'll stop there, and now I want to give more time to Q&A in this call. So thank you for your constant support, and I'll be happy to take your questions and comments at this point.

[Operator Instructions] First question comes from Mahesh Kumar, an individual investor.

When you took over last year, you have been talking about GenAI. So after 4 quarters, can you explain with at least 2 use cases where you have got the customers for GenAI, and how you are helping them to improve their performance? That is first question. Second question, the impairment has resulted into a loss of INR 145 crores. Are you going to write off that from the share capital reserve? That's the second question. Third question is how confident you are to continue 10%-plus growth for the next year and so? These are the 3 questions.

So coming to your first question on GenAI. There are a bunch of use cases that we have been working with our clients on, but if I were to take, like you asked for 2 use cases, the first 1 would be the contract assurance use case, which is pretty much -- as you know, telcos engaged in, I would say, thousands and thousands of contracts, right, with their suppliers, with people. And what happens is the subscribers and that there's other partners, enterprise partners. So what happens is that they need to understand that the contract often times, the contracts doesn't fall by the website of the actual service being provided. So what we are doing is we have actually come up with the service, which is contract assurance. Now contract assurance itself is not a new concept. But our contract assurance is actually in LLM actually. It's the large language model that we have used here, where we [indiscernible] contracts with invoices. So this is one use case that has proven useful to us. The second one is, of course, the handset, right, handset fraud. As you can imagine, handsets are a big spend item for telcos globally, more so in West where you actually almost buy a plan and the handset comes free. So we see a lot of fraud actually in handset. Fraud in handset is one of the, I would say, one of the biggest fraud cases that there is. So how can we help them in making sure that they don't sell the handsets to the wrong people and frauds don't happen. So that's another GenAI use case that we have actually manifested for telcos, and we are working with I think 32 telco companies. There are other use cases around [indiscernible] call center data as well. So people usually call, right? As you can imagine, on -- when you get your invoices, sometimes invoices are not correct. So people call a lot of telco call centers and want their invoices and all that corrected. So if you -- and for one of the large telcos when we did analysis, we saw that almost 11 million calls come in a month or so. So we have also done GenAI, LLM, there actually we've used small language model SLM where we have been then able to tell the -- empower the call center agent to seeing the question even before it comes. So we are able to tell that a call is going to land because there have been a willing [indiscernible]. And this, we are actually able to do for a telco today. So a lot of telcos, we are seeing that fraud has actually become a very, very area. And all the AI use cases even for us because they are anyways the revenue assurance and fraud players, we are seeing that fraud use cases for us that are landing on our table at least on [ Subex ] a lot of it has to do with fraud using AI. And we are using GenAI to make sure that it's more empowering tool not just, I would say not just to executives, but even a call center agent who can take the call very easily. There's [indiscernible] fraud, there's data fraud. So there is a lot of fraud use cases that we are solving using GenAI. So excellent question. I'm actually, I'm kind of glad that I've got to talk about it a little bit because oftentimes, it sounds like it's very -- the concept is clear, but we don't know what we are doing with it. But I assure you that there are real use cases that are being applied by telcos. In fact, some of the telcos that we work with, when we go and talk to them these days, they straight away ask us that can you get us not AI productivity. Can you get us GenAI productivity. It's actually that focused basis. So in that sense, I'm glad that we have been able to actually deploy these cases. So was a...

You are already having paid customer for this GenAI?

Yes, we do. Yes, we do.

And this handset fraud, it's a paid customer?

Yes, it is. Everything that I spoke about, none of this is free. It is all -- these are all [ POCs ], but these are all paid [indiscernible].

Okay. You are being POC. And regarding large language model, are you also working on large action model, which will complement this LLM?

You mean the next [indiscernible] and things like that? Yes, we are. Yes, yes. It goes in conjunction, right? Only analysis is not enough. You have to be able to tell people what is the next [indiscernible] that you have to take on that. So we use LLM to orchestrate, and we give the [ NDA ] recommendations. So absolutely.

These are all open source LLM or it is proprietary LLM of [ CBEX ]?

So what -- No. So there are LLMs that we can develop. What happens is these are open-source LLMs but these are fine-tuned or trained to telco data, right? I like to give an example that if you just ask LLM today on roaming, that LLM does not understand roaming in context of telco, right? Roaming is everything. A roaming could be you roaming somewhere. So what happens is that you use LLM that are already there and then you train them to that telcos context, the data. So we understand telco data, and we train them on that data. So LLM is open source, but context is provided by us. It's something like that, yes. That was the first part of your question. The second part of your question was on impairment, yes. Yes, you're right. It will be taken out of our results. You are correct about that. Okay. And third question, my apologies. You had a third question there.

Third question. This year, we have 11% year-on-year growth. Yes. Now after spending 1 year in the company, what is your gut feel that next year, we will cross 15% or around 20 -- 15% to 20%?

It internally, my -- I mean, again, it's forward looking, so I don't want to provide specific numbers.

You might given some targets.

Exactly. I mean my own target is I've been telling internally people that this has to be a bigger player for us. This is what I've been saying that we have to buck the trend. We can't keep at the levels that we have been. This needs to be the breakout here that where we need to really take out our growth. And so like I was saying the shape of the curve, right, while the curve is upward moving, I want to make it sharper for sure. And I'm with you, right, I'm with investors on that. I understand what is the expectation there.

What have you seen in Subex, last 6, 7 years, never they have given any target whether internal or external.

No with all due respect, that is not the case. Mahesh, I mean, I understand where you're coming from. I completely emphasize where you're coming from. Because obviously, when you don't see growth, you feel that people are not oriented -- growth-oriented internally. But I can assure you, with all due respect to Vinod, Vinod also used to have targets. I mean, a company cannot work without targets internally. And this year, I can definitely tell you that we have set ourselves very strict targets because I -- personally, I want to make sure that this happens to be almost a breakout year of where people can very visibly see the growth. So that definitely is an internal target that all the teams are driving towards. I'm driving towards this, teams are absolutely aligned on this. So I can assure you, that would not be the case. Targets have been pressed because we are well within, we're 1 month is already out in the new year.

[Operator Instructions] Next question comes from Hiral Nandu from [indiscernible] Capital.

Just wanted to understand my clarification with you. The write-off of one off to [ Q2 ] just now as an impairment, whether do we expect some reversal of that in our future year? Or is it kind of completely needs to be taken with the loss as a mindset?

I will ask Sumit also to weigh in as the CFO. But this -- so this is actually a routine item that happens when you carry goodwill, right? So what happens is that we do routinely, we do impairment assessment of the goodwill. And this year, we decided to take some impairment. So usually, when we take impairment, I don't think there is a reversal of this, but what we are trying to see is that growth drivers are in place. The growth has been delivered, PBT is actually positive if you look at it without the impairment. This is an exceptional item, we'll take it as such. So we'll go forward from here. Sumit, do you have anything to add here, yes?

Yes, Nisha, same thing. Just to add on, this is -- so there are 2 goodwills sitting. One is in to a stand-alone books and another is into the consolidated book. So this asset was then the goodwill to the tune of pre-write-off or pre-impairment, the goodwill is sitting in the books of INR 344 crores. And this is the yearly impairment exercise, which is in order to do, you need to keep testing the intangibles for their carry effective use of that. So this year, there's a charge of close to INR 148 crores happened which is in the consol books, the value of the goodwill has reduced from INR 344 crores now to INR 196 crores. And the corresponding impact because the same amount is getting through an intercompany to a stand-alone, the same has been corresponding impact is there. So I'm just repeating you the first question which the earlier investor has asked. As a treatment, the asset will reduce, and effectively, this amount will be taken out from the other equity. So that is the accounting treatment. And there is a yearly impairment exercise, which the accounting standards do it in order to recognize any sort of an intangibles in the books.

We have a follow-up question from Mahesh Kumar, an individual investor.

In the September quarter conference call, I asked this question, I asked you a question about software-defined vehicles and providing IoT security to that. That time you told you will discuss internally and get back in the next call. So now is Subex going to continue with the IoT security and target software-defined vehicles?

So again, I just want to clarify a little bit what we do in Subex under secure is OP. We actually don't focus on IoT, so we do industrial security actually. So we don't do IoT [indiscernible]. So I just wanted to clarify that much. I think maybe I did clarify last time as well. But in terms of software-defined vehicles, honestly, given the challenges in front of us where I am mentioning at least where we are as a team to see if we can double down on telco. And if you look at automobiles, right, it's actually a very complex -- it's complex based actually and building hardware to get into automotive would require investments that might be beyond, I would say, the results we have currently. So what I'm thinking is that we should double down on telco because the kind of growth that we are looking for right now, right, telcos are growing at their scale, right? It's multi-billion dollars, they are growing at 3% to 5%. So there is ample headroom for us to grow there. So to get into a new segments like automotive would require a very aggressive investments for us. So that's all that I have sort of passed at for now, but this is where -- I don't know if it answers your question, but yes, I think we'll have to reevaluate it once we are -- I feel a little bit more stable on the growth at the bottom line. Once we start locking this for a few more quarters, then I think we'll be willing to take some more bets which are a little bit more risky. Right now, I think the appetite to invest is more on the core.

So this industrial IoT, what you are mentioning, is that business still you are going to push or that will take a back stage?

No. So that business actually already is doing good business, but it's not in telcos. But again considering that we launched [indiscernible] IDC back in, I would say, much 4 or 5 years ago. my expectation of those businesses is completely different right now in the sense that I want to see a growth rate which is commensurate with the money or the capital that we have put into the business. So we are pushing those businesses very hard, but if we have to make some calls appropriately we'll make those calls. That's where I am because I feel that right now, we really need to double down on calls. But those businesses continue to do business actually. It's not automotive, so they are working in utilities. Today where their [indiscernible] utilities not telco. But again, we have to make those calls depending on what their burn is and how much money do I have for investment. After all, I feel that one of the key jobs that I have is prudent capital allocation, right? So capital allocation being my key jobs, I want to make sure that I allocate capital, which will give me a lot more return. So everything is viewed in my lens. I view every investment call with fact, right, to make sure that IRR is way more than buyback. My cost of capital has to be very well adequately covered. So that's the lens or that's a metric of investment in any business that I do internally or externally. So I think -- now ask from those businesses is great, are very high in my opinion this year, and I hope that they will deliver. Otherwise, we'll make some calls. That's all I can say at this point.

So that business was actually routed through telcos only in the past?

It was, it was. But today, if you look at their footprint, it's entirely -- it's actually 100% non-telco. Okay. So that's -- yes, it's 100% non-telco.

Next question comes from Raj Kumar Ojha, an individual investor.

My question is, in FY '23, we had 43 customers as far as IDcentral is concerned and 21 customers as far as security is concerned, how many customers we have added in this calendar year?

Raj, can I get back to you. I'll take this question on note, and I will ensure that we absolutely get back to you. IDC, I think we have around maybe 125 or so. I can come back to you with the right number, but I think it's around 125. [indiscernible], I am not entirely sure, but please make a note of this. I will certainly make sure to get back to you.

See every quarter, we are winning 2 or 3 cases. But the quantum of role that we should [indiscernible], it is not there. It is not happening. Or it is not being reported. I can put it that way.

No, no. So one is that I can assure you that even more than 2 or 3 are reported. Once we report [indiscernible] generally the ones that we want to report in the sense that we feel that it's an interesting geography. It's an interesting project, the size or it has a good AI component. So there are other factors in which we end up reporting. So I can tell you that, first of all, what we report is not equal to what we went -- even much more than we report. The second one is, of course, as you know that we are on the SaaS model, right? So we are on subscription business model. So what happens is that when you win a contract, like Sumit has also explained in the past, and you can weigh-in here. But typically, when you win a contract, we have a setup, we recognize some amount of license immediately. But after that, what happens is that we have to wait for the implementation of the project, and that's when the subscription revenues start kicking in, right? So moving into subscription model delays revenue a little bit. So although you are [ takeaway ] the actual -- I would see the impact of it a few quarters down the line. Because once the implementation in that account is done, that's when the subscription revenues start coming into us. And that's when you will see the [ MRR ] growing, right? So that's why win is not equal to immediate uptick in the revenues. But win definitely assures us that you're a few quarters down your revenue is now locked. You already know that some amount of baseline has been created with everything. So that's how the SaaS model works. So you may not be seeing it immediately, but I can tell you that a few quarters down the moment it gets implemented, those revenues start kicking in. So that's how it works.

You have said that IDcentral and this sector is concerned, you said that you are going to try this product in different geographies. And we are still -- we still confined ourselves into Middle East, India and Africa.

No, no, actually, no, Raj. No, actually, not at all. Sectrio impact some of the biggest contracts we have in Middle East and in the CALA region, that's more Mexico and those regions. So it's actually non-India, we have India, but the 2 larger contracts are actually non-India. And IDC also has done a lot of business in India, but it has also done some business in Africa, actually. So that's also -- IDC, I just wanted to correct that I think it's I believe that it's 50 is the number of the clients that we have added this year. But like I said, I will definitely get back to you on clarifying these numbers. I don't have them handy right now, my apologies.

What about Subex account aggregator. What is the progress?

Again, that -- so we have an [indiscernible] approval. We don't have the license yet. So what that requires is for us to identify our business case and make investments in that infrastructure this year. And once we can show investments in the infrastructure, then we can go and apply for the full license. So what we are doing is we have some use cases that have been identified. We are doing the business. In a sense of that does it make sense for us? And what would be the investment versus the return. Like I was saying, right? If I make an investment, I want to make sure that I have a view of how I'll recoup that. So we are making those calls internally right now. So where we are, we don't have the license yet. We have just an instance of [indiscernible].

In the presentation deck, you had mentioned that you were going to introduce some new products. Can you give any hint?

We do actually -- we have [indiscernible] of new products. So they are -- so for instance, if I were to give you an example, we already do, let's say, we have done like Mahesh's earlier question on GenAI. So we have something called AI agents right now. So AI agents are people. It's almost like it's a product that sits on alongside our fraud management solutions where it can go and investigate a fraud entirely for someone. So AI agencies for -- is one of those products. The second one would be on billing, right? We have an interconnect wholesale billing solution. We have actually added an enterprise solution as well to our portfolio. So there are new products, and it's not just 1 or 2. Actually, we have added almost 4 or 5 products right now.

[Operator Instructions] Next question comes from Ravikant Agarwal, an individual investor.

Just a small update that Mr. Vinod never shared any updates on growth rates and targeted profitability. I'm significantly invested in Subex, and I attend every con call, but I'm happy being a silent audience because most of the queries get answered. But the only question till date I have asked is in the last con call, the last question in the last con call that Mr. Vinod attended. And it was precisely the same question, but he did not answer. Yes. Internally, he must have definitely had targets, but he was always very reluctant to share any kind of numbers in the con call, and which was basically practically defeated the purpose of conducting these con calls because investors would never get any idea of what the company is targeting at? And this was my grievance which I had shared with him as well. Ma'am, coming back to my question. Ma'am, I just wanted you to throw more color on the strategy behind this account aggregator license. Is the company looking at pivoting into fintech space? And once it is granted, what kind of opportunities do you see going forward? And can it help Subex transform into more of the offerings of Subex into a more diverse nature since fintech has a much larger landscape as compared to the businesses you are already operating in, which are almost saturated, and you are almost working with almost 80% of the telcos across the globe? That is my question, ma'am.

Okay. So first of all, I'm glad to kind of speak on the call today. It's always good to [indiscernible] questions because we also see what is it that we need to focus on. But coming to your question on fintech, Ravikant, we actually already do fintechs today. So our account aggregator license is not a way for us to get into fintech. We actually already do for fintech. We do fintech of telcos today. So we manage wallet of telcos in some of the regions. And we use AI to predict, let's say, what will be the next bill, which customer will churn first. [indiscernible] mobile money assurance, that transaction are correct, we actually already do a lot of work in fintech. So A is more for me to see what will be the specific use case. And again, we have to remember that when I do fintech, I do globally, right? For telcos, globally I'm able to do fintech business especially with my AI and my fraud management. But Al, actually, the account aggregator license restricts into India market only. Correct. So it's only an India market license, it's not something that I can work outside with. So the business case for that's going to be different, right? The business case could be, let's say, that the GST payment or is it SME payments. So we'll have to figure out. So we have quite a few roster of use cases that we are looking at. Because the commercial has to makes sense, right, at the end of the day, the A adoption, the amount of money that we can actually get vis-a-vis the investment that I'll have to make. How many years will I have to stick to the investment before it turns positive. So account aggregator doesn't necessarily give me more seats to get into fintech. I would say that I'm already in fintech, and I'm actually expanding our portfolio as we speak in fintech.

I get that number, but I mean the way we are in fintech right now is more in the form of support services. Are we looking at developing some kind of proprietary products, which we can take it to the market and make it our USP?