Systems Limited (SYS) Earnings Call Transcript & Summary

Thank you, everybody, for joining this corporate briefing session of Systems Limited. This is an update on the recent results and way forward. As you know, the Systems is one of the largest listed IT company in Pakistan and in spite of some challenging issues like wage inflation, a stronger rupee, the company has posted decent growth last quarter especially after taking over Confiz and BAT shared services. [Operator Instructions] So we have the pleasure to have with us Asif Peer, Chief Executive of Systems Limited, along with him, we have Roohi Khan, CFO. So it's over to you, Asif.

Okay. Thank you, Sohail. And good morning, good afternoon, good evening, everyone. We have a global customer -- global investor base. So thank you for joining us, and thank you for being a loyal shareholder of Systems. So what we would do is, as a normal pattern, we would not take a lot of time and presentation. I know there are a lot of questions around AI, around -- as Sohail mentioned about our recent acquisitions and so on and so forth. So I would love to address all these questions that what you have, please start putting in the question chat, and I think the moderator will moderate and ask the question club and ask the question, and I would love to respond as many as I can in the time. So just for the newcomers Systems at a glance, we have been in the business for long. Now we have present in multiple countries. We are a global company. We're a global system integrator, global innovation partner and transition to multiple geographies. Our whole focus is dollar-based growth, export-based growth, and that's what we are focusing and you will see in our numbers, 85% of the business is coming from export as well. AI is being at the forefront to AI and digital transformation goes hand-in-hand, and it cannot work with the data and cloud. So all of these things needs to happen and all these vertical expansion requires and give you the domain expertise, that's what we follow that. We do not want to have a spray paint approach. We would rather want to have a focused approach where we can compete and add value to our customers. So of course, as the growth is growing, employees are growing, customers are growing, and we are grateful to our customers, grateful to our shareholders. Next. So this is a very high-level fact sheet. As you can imagine, from the growth perspective, we are well above our targets of right about 30-odd percent growth. Also all the other variables are growing. From -- we will address that the profit and revenue and the currency linkage in the next slides. But of course, we were -- we just want to highlight to all our shareholders like and investors, the Forbes again, recognize us. We are the only Pakistani company who has received this accolade and recognition 6 times in last 7 years. So this shows the -- that shows the persistence, that shows the resilience, that shows the sustainability that what Systems is offering and I am really grateful to all my team and all the shareholders again. So we have been receiving various accolades, and we are the partners of Microsoft Inner Circle is also I want to highlight here. Microsoft Inner Circle is, again, it's not just an accolade. It's top 100 partners globally, not Pakistan or anywhere, globally, and we are one of them. We are proud to be one of them, again, 5 years in a row which again shows our consistency and our delivery to our principles and our customers. Next, Roohi. Roohi, you want to highlight financial performance?

Yes. So on financial performance, as Sohail has also highlighted that despite of the challenges that we have been facing last year, this year. Systems revenue is continuously growing. This half -- first half of the year has also grown by 36%, and we have a CAGR of 31% for revenue. The GP margin was around 26% with 37% growth versus last year, and operating margin also grew by 29% and stayed within the same range. This is same slide. Now in terms of segment performance, this is vertical segment. We have technology continues to be our fastest-growing segment. BFS telco, technology and retail. These are 3 -- 4 major segments. All segments are -- all verticals are showing good growth and technology leading it with the margins also, GP margins are also above 20%. Telco because mostly most of our -- this Telco is -- Telco is Pakistan, yes, so that's why the margin is around 17.5%. But you see that all are in the mid-20s. This is our geographical segment where Middle East and Africa is our largest segment, contributing more than 50% than North America. All segments have shown good growth. In Asia Pac, there is a significantly high growth in this first half of the year because of one specific onetime project, which had a high margin as well. But this -- on a full year basis, this growth will normalize. Then we have -- on this segment, you can see that Pakistan, which used to be a negative number in losses, but the margins are improving in Pakistan as well as we had committed in the previous investor briefing sessions. It was from 8.9% to -- we gave a 17% GP this first half. This is a quarter-on-quarter performance. So you can see that versus Q2 versus Q2 2025 is also 39% growth in revenue and 32% growth in EBITDA. So despite of the currency challenges and appreciation, the profits are also growing consistently. This is an important slide for us because it depicts that 94% of our revenue is in -- sorry, I think there's -- this is not -- the blue is foreign currency and -- light blue is foreign currency and dark blue is PKR. So actually 6% is PKR and 94% is foreign currency-based revenue. On the other hand, 44% of our cost is in foreign currency because this is the cost denominated in our subsidiaries and the balance is in PKR. These are some -- so this slide shows our head count dispersion with the acquisition of Confiz we have some head count in U.S.A. as well. But this shows that after Pakistan, UAE because of the nature of projects have some on-site resources. Egypt is our second development center. This we have already seen. So this is client composition made on rolling 12-month basis. We are continuously working to grow our customer base from the smaller tiers to higher tiers. So you can see that from 43, we have 63 customers now in $1 million to $5 million bucket. And 2 more customers have been added to $5 million to $10 million bucket. Asif, do you want to take AI?

Yes. I think first, I would like to -- I think there is a question like -- and I'm sure there will be more questions. But I think people are thinking that what is going to happen is that AI is going to take over the work for the developers take over the work for the BPO and the industry will be suffering from a lot of downturn, and there will be no people left and where the revenue is going to come from. So I just want to, in a way, lay [indiscernible] language that first, I want to explain what AI is doing and what the companies like us will be benefiting it from it and how we can be benefiting from it. And it's of course, if you -- there is a strategy and if you don't follow the strategy, then, of course, you can't benefit from the good things as well. So what AI is doing? First, let's -- I would just take 3, 4 minutes because I'm sure it will address a lot of questions people will be asking at the end. So basically, AI is reducing the basic work, like basic coding if you want to create a website, if you want to create a mobile app, people want to create a simple -- if you are a small enterprise and you want to do something, it's definitely going to help and create that easily and very fast. If you are a contact center agent and if you want to answer the calls there are a lot of calls can be handled, easy calls can be handled and even difficult calls can be handled by the agents, right, and AI can handle it. But on the other -- contrary, AI cost is too high as well. AI is not still cheaper. It takes -- if you are following the news, if it is like -- if you are paying for any license, if you're using the license version, you are only paying 10% of the cost and the companies are like subsidizing you 90% of the costs that what you are incurring on their platform. So definitely, it's -- all of these things are going to catch up. Now answer to this question to your -- one of the possible question is that what the company's like Systems and many other global companies, which you all follow what are they doing? What is happening? AI Creating more opportunities for us because enterprise AI at scale. When I talk about like a simple application, these enterprise clients, which we serve, it's not simple applications, right? It's basically, they have designed applications in the in silos 10 years ago, 5 years ago, they have multiple data sources. And if they want to leverage AI they want to have a data engineering, data consolidation and everything needs to happen. and AI use cases in the model and everything needs to be developed by someone to scale that. You can have a POCs done. But POCs is -- are the POCs, right? So -- but I enterprise AI to scale requires a lot of manpower to fix that. And then you create the models that work on that data. And that model will run and agents will run an autonomous way and take care of a lot of automation. So what is happening is that once it is done, then there are more opportunities come to optimize further and get a more disruption -- disruptive models come. So it is, what -- that's why you are seeing the growth in our numbers. It's not by accident we are getting more work than the less work because AI is creating more opportunities and the less opportunities because there is a lot of data consolidation needs to happen. There is a lot of work it needs to happen. A lot of integration needs to happen. Agents in AI cannot work as silo at enterprises. I'm not talking about a small and medium organization. If you look at our client concentration, Roohi shared like we are working now greater than 90% of our customers are enterprise scale and enterprises have very complex ERPs and complex manufacturing, complex interfaces. It requires a lot of sophistication it requires a lot of mental models. And that's why we call it like in today's why we call it like -- we are not too small, right? We're not too large. So it requires scale and agility both. When you want to be frontier firm, when you want to be -- what we go and tell our customers, you are not going to just insert AI tools like what you guys are using ChatGPT and Claude and all of these things. AI transformation is not inserting the tool. I transformation is how you redesign your work. And when you redesign your work, then it requires a lot of work. So redesigning the work and just inserting AI tool, there is a huge difference. And that's why what we truly believe that balance of scale and agility, where we bring to the table, we added the sweet spot where we can definitely bring more value to the customer. And we are agile enough and that's what we are working with the customers. And I think one more thing that I would like to highlight that why AI is going to benefit because every customer who we have, like if you have seen 300 customers, all 300 customers are asking us to do their AI transformation. So who is going to do it? They can't do it by themselves. It's hard. It's change management. People are not changing. That's some first resistance. So they need a specialized company who come with that focus and consultant bring that execution. So what we believe is AI does not definitely reduce the work. It increases the work at an enterprise customer level. I'm not talking about the small and medium shops. Small medium shops can do their CRMs, their training system by themselves, but they are not scalable. They can just do it by themselves and for their organization, but they can't scale. So basically, of course, for routine technology work, as I said, it's going to be reduced, but for -- what we are using AI is very different. We are partnering with all the big vendors, big principles, big OEMs because they are coming with the tools. Every -- Microsoft is coming left and right. Salesforce is coming left and right. So all of these companies are coming up with their tools and technologies, and they need partners to implement because now the question has changed. Even Microsoft has changed their question. It's not about selling more licenses. It's more about consumption they will sell you the copilots, but if you don't use it, it's done, that story is over. So they need partners to make sure we do handholding to our customers and make sure all the consumptions happen. That's why increasing the pie. That's why the revenue increase is happening. So I think it's -- what we see that combining productivity domain knowledge. That's why if you highlighted -- Roohi has highlighted that, again, domain knowledge is the key. And that's why we are focused on BFSI, telco, retail, CPG and public sector because that's where we can scale our domain knowledge with our AI, with the talent put that we bring with the cost advantage that we have, that's all combined gives a winner and a value proposition to our customers. And that's what we are selling. And it's resonating well because, as I said, everyone wants to do it. They don't know how. They don't know how to scale. I think I will just end it at one point, like what has been happening, which you guys are seeing from outside, a lot of proof of concepts are happening. A lot of use case discussion, but proof of concept to a proof of impact journey is now the gain, what is the value that is created and a proof of impact. That's where the companies like us is required to create a proof of impact, not just the proof of concept, right? So Roohi next.

Asif we can open the floor for Q&A. There are some standard ESG slide. I'll upload the presentation. We can -- Sohail open the floor for Q&A.

[Operator Instructions] So we have a few questions related to Asif. I think we'll start with that and then move on to some specific questions for Roohi. So the first one, Asif is that the North American segment grew by 36% in the first half, largely due to Confiz. So can you give us some idea or guidance? What was the conscious portfolio contribution in this growth? And how much is your core system operations contributed?

I would say, basically, Confiz definitely contributed because they have a big business in U.S., and that was the main reason for our acquisition as well that we can cross-sell and upsell, and we can have a lot of footprint over there. So I would say it's -- Confiz's footprint is about 25%, 30% and rest is ours. Of course, we're very optimistic. There's a lot to come.

Okay. On a similar note, what cross-selling and upselling opportunities? Are you looking post acquisition? And what would be the ideal time line to materialize this? And what type of synergies do you expect now with the merged entity?

I would say it's a very exciting opportunity like a very real opportunity because the customers are enterprises. That's what I was explaining in like last 5 minutes because Confiz customers are enterprise customers. And enterprise customers you can sell a lot and everybody is talking and asking about the AI and the data and a lot of work. So synergies are already, I would say, the structure, the synergy, the team, that has been done in the H1. Now we are focusing on execution, the cross-selling and upselling opportunities in the second half. And then we are really hopeful to get a tremendous opportunity and uplift the next year.

Okay. On UAE, how is system working in line with the U.S. government vision of making AI a partner in decision meeting rather than considering its -- like a tool. So what are you doing there?

It's an endless opportunity, again, in UAE, that every public sector entity has been mandated to have Agentic workflows and agents, certain percent of agent workflows and agents working in every department or every government department. So we're getting a lot of opportunities from our own existing public sector customers, and they are asking us to do the agent workflow a few agent use cases. So we get an opportunity in down like from our own existing customers, and I think that is a great reference, great learning, great opportunity. So that's why -- there is 1 reason I think that is not going to stop because it's coming from His Highness and this is how Dubai has transformed. We have seen it from digital services arena to mobile application to e-services to everything and now the AI. So now -- earlier AI now Agentic. So when they see it, they do it and they are forced to do it because a lot of competition and a lot of KPIs assigned to it.

Okay. So now with around 58 million new shares issued to Confiz and dilution already affecting the EPS growth right below the net income growth, what's management have any further plan on the M&A or capital raising? And if so, would you commit to a share buyback or a floor on dividend per share to protect existing shareholders from any further dilution?

We will definitely -- I think in today's day and age, M&A is really important to grow faster and make it stronger based on the skills based on the market access, based on a lot of benefits. So I think M&A, we will not stop for sure. We will -- we are looking at it, and we will -- but of course, it's not just the sake of M&A for M&A, but we -- as soon as we will get another goodbye, we will definitely integrate it because it's going to improve our footprint only, right? So from a dividend perspective, our dividend policy or process, I would not say it's not documented, but whoever is following us from last 10-plus years, we pay 20% to 30% of our bottom line into dividend. So that dividend is going to be there in absolute terms since we are growing because if you acquire, if you talk about dilution in absolute terms, our profit margins are increasing, right? So it definitely covers for itself. It increases more than what the EPS dilution is if you're talking about dilution of 3%, 4%, but the revenue increase and as well as profit increase will be much higher. So shareholders are protected from their share. Buyback, I think there is always a debate in our head as far as the strategy is -- should we do buyback on our own shares or we buy and acquire more companies and do hyper growth, right? So because cash is limited, right? And you put -- I think from a growth mindset perspective, we truly believe there is a lot of opportunities that we can leverage this cash and arbitrage at much better for our growth and shareholders growth will happen. It's a growth -- we are a growth story. We are a growth company, so we focus on growth only. And like if you have seen 44% CAGR for the last 5 years, that is the testimony that whatever we are doing, it's a growth. And I just want to make sure that I will double down -- we will double down on the dollar-based growth even if currency, whatever Roohi is saying, PKR appreciates, we lose money, we don't care. We will have export-based business. We will double down on dollar-based business, 94%, it will be 95% we are not going to stop growing because currency is appreciating. It's whatever the phenomenon it is, we will deal with it for a few years. If it is a few years from a margin perspective. But we truly believe on 2 things: dollar-based growth. If 95% revenues in dollars, you can't go wrong, right.

Okay. So coming back to North America business, where the revenues grew by 35%, 36%, but the margin segment profits were flattish. So any reason for this lower...

It's an acquisition. In an acquisition when you acquire on day 1, you can't print optimization and savings on day 1, right? It takes a little bit of time. So we are really hopeful with the optimization that we're going to do. It will definitely -- once the synergy once the volume is up with the same people -- same workforce, it's definitely going to improve for sure. I'm very confident about it. But of course, it's -- everything -- like it's just -- like we've just taken over literally a few months ago so to start. So now we just really need to make sure that we find synergies. We remove the overlaps we remove the frictions and we improve the margins further.

Okay. So just a clarification question. In Middle East, the overall portfolio grew by 38%. So this is excluding Confiz, right, this is a Systems core portfolio, right?

Yes. Confiz is very, very decimal places in that.

Okay. I think another question maybe towards Roohi. Other income, as you know, they've taken a hit. So any reason for that because interest rates were pretty stable. So what is the reason for that, Roohi?

So other income that you see has -- if you see on the face of it, it has 3 main components. So one is obviously exchange gain which in this quarter, we did not have a gain which in this quarter, we actually have -- in this first half of the year, we had exchange loss because of currency appreciation. So overall, other income had gone down. On the other part, if this question is with respect to stand-alone accounts, we had some intercompany receivables on which we charge -- mark up to our subsidiaries as well. So those balances had come down in this in this first half of the year, where we had some collections from our subsidiaries. So those that interest income from our subsidiaries is also much lower in this first quarter. The profits on deposits has actually gone up.

Is it the -- yes, yes, go ahead.

No, no, exchange losses, of course, when component -- I would...

It's driving.

I'll add one thing is basically, it's very -- I think we have done the calculation as well. I think Sohail you were also part of many conversations. I think -- we all expect like when the inflation is up because in services industry, we have to pay for inflation to our people, right? So regular cost increase by 10%, 12%, 13% every year. But if currency appreciates by 1% or 2%, it's definitely what the margins get depressed because of very simple economic rules, right? But as I said, we will keep growing dollar-based income. And I can just correlate like for any calculation purposes for you for 1% devaluation from now, it will decrease our net profit after tax by more than 1%, right? So it's very directly correlated, right? So I think -- and similarly, the other way around as well, so.

On telco, your revenues are going, but profits are under pressure. So any specific reason during the first half?

It's going to be normalized. There was 1 or 2 projects in telco, we had in the first 1 or 2 months of slip. Also Roohi mentioned that, of course, we have a local component of telco business as well and local business, of course, has a low margin as compared to the Middle East Telco business, right? So when you average -- but it will be better in the second half.

Understood. Understood. So I think if you just exclude, as you said, that the rupee is getting stronger. So what was your organic growth in the first half if you exclude the FX swings and if you exclude the Confiz acquisition. This is -- and related the swing is...

FX swing is the other way around, right?