Tanla Platforms Limited (TANLA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Tanla Platforms Limited Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Ritu Mehta from Tanla Platforms Limited. Thank you, and over to you, ma'am.

Hello. On behalf of everyone at Tanla, I would like to extend a very warm welcome to our investor call. Joining with us today are Uday Reddy, Chairman and CEO; Deepak Goyal, Executive Director and Chief Business Officer; and Aravind Viswanathan, CFO. Uday will share us insights and strategic reasons behind this acquisition, followed by Aravind who will dwell into financials. After opening remarks, we will be happy to engage the participants and address their questions. Before I hand it over to Uday, let me draw your attention to the fact that today's discussions may feature statements that are forward-looking in nature. All statements other than statements of historical fact would be deemed forward-looking in nature. Such statements are inherently subject to risk and uncertainty, some of which cannot be directed or quantified. A detailed disclosure in this regard is mentioned in the presentation that was uploaded on our website. Audio recording and transcript be available on website soon. Now I hand it over to Uday.

Thank you, Ritu. Good evening. Thanks, everyone, for joining the call. I'm sure you have seen our presentation on ValueFirst acquisition and I'm very excited about the opportunity here. While I will ask Aravind to take you through the acquisition details, let me share my thoughts on the acquisition and what it means to Tanla and CPaaS industry in general. Over the past 2 years, I've been asked three questions consistently on the enterprise business. First have been the implications of global change with large balance sheets entering the Indian market. I've been consistently maintaining that India is in a unique market -- in the unique market. To succeed in India, what one needs to know is local knowledge. I mean one needs a deep local knowledge, ability to work with the entire ecosystem from enterprises to mobile carriers, and deep domain knowledge. This is a secret sauce of our sector. Acquiring ValueFirst from Twilio is a validation of this long-standing belief. The second question has been the competitive dynamics due to Airtel competing with CPaaS players in India, largely around pricing. While there is a certain amount of disruption when Airtel made this entry, I think industry has stabilized over the past 12 months. Airtel is both a competitor and partner, and I think the ecosystem has learned the art of coexistence. I think the phase of market disruption is behind us. As we gain the scale with the ValueFirst acquisition with the overall CPaaS market share of 35% less, we recognize that we have a major role to play to drive responsible industry conduct. We take the responsibility very, very seriously. The third question has been around international expansion. ValueFirst is a player in Dubai and Saudi, and making inroads into Indonesia. We will leverage this acquisition to significantly scale our international operations both on platform and on enterprise business. So in many ways, this acquisition has addressed the key questions asked to me. Why -- so why does this acquisition make sense for us? I see five strong reasons. One, a significant bargaining power in sourcing. ValueFirst will help us with the further bargaining power in sourcing. We were always larger, now we have become larger -- largest rather. The competency -- sorry, the second point is complementary customer base. Our India customer footprint is very complementary. We have 50% share in large enterprise segment, and now ValueFirst brings in 20% share in SME segments. Customers contributing 40% of the acquired entities, revenues are net new to us. ValueFirst will cross-sell and upsell to our customers and vice versa. Point number three, drive strong operating efficiencies. We look at the financials in detail as part of the due diligence. I see significant headroom on efficiencies on both direct, indirect costs. We have clarity on where we can add value and improve. The fourth point is cultural fit. We have a strong relationship with both ValueFirst and Twilio. And Twilio believes we are a natural partner to house ValueFirst employees and customers. Last, but not least is talent. It is not easy to build talent with a big expertise in this space. Vish and his team has a tremendous domain knowledge, and we will leverage this. They have a strong platform called Surbo, which we can use for our customers. In summary, we have an incredible track record on acquisitions. We brought Karix and Deepak and his team has helped EBITDA grow from INR 25 crores to around INR 500 crores in the last 4 years. The same team which delivered the value at Karix will work with ValueFirst team to unlock the value for our shareholders. Now I'll ask, Aravind will take you through the deal construct and financial implications.

Thanks, Uday. Good evening, everyone. Let me quickly give you an overview of the acquisition that we announced. We announced two acquisitions. The first one we signed -- we signed a definitive agreement to acquire 100% of ValueFirst India from Twilio for a consideration of $42 million, which translates at current exchange rate to around INR 346 crores, subject to upward closing adjustment between $2.5 million to $3.5 million due to the net cash in the business. We expect to close this transaction by early July 2023. And we should see the full consolidation of this entity in our Q2 numbers. We also signed a binding term sheet to acquire 100% of ValueFirst Middle East from their existing shareholders for a cumulative consideration of INR 20 crores through a combination of primary investment and a secondary purchase from existing shareholders. This entity addresses the market of UAE, Saudi and Indonesia. We expect to close this acquisition in September '23 and we will see the full consolidation of this entity in our Q3 numbers. We are funding this purchase consideration from our internal approvals. We are incentivizing the management team of ValueFirst for both performance and retention with a INR 50 crore RSU grant in ValueFirst which will vest over a 2-year period. The overall revenues of both of these acquisitions combined is around INR 950 crores. As Uday mentioned, ValueFirst is an existing customer of ours. So if I adjust for that intercompany, the net incremental revenue to Tanla Platforms would be around INR 650 crores. The combined EBITDA of the acquired entities is around INR 50 crores. Today ValueFirst operates around 5% EBITDA returns. EBITDA for Tanla in Q4, we exited FY '23 at around 20% EBITDA. And if we just consolidate on a like-for-like basis, the dilution due to the acquisition would be around 2%. Our plan is to mitigate this impact by improving the ValueFirst EBITDA from current levels of around 5% to double digits in the next 2 to 3 quarters. We have a solid plan on this, Uday referenced it, in terms of the efficiencies that we see. And that's the focus for us from a profitability standpoint. We expect to mitigate the entire impact of the EBITDA margin value return by the end of the financial year. Overall, this is a very attractive acquisition from a valuation standpoint. We are acquiring an entity at 7x EBITDA multiple, for a business which is operating at very, very low EBITDA levels. As we execute our plan on driving synergistic growth both in India and overseas, coupled with our focus on margin expansion, we see significant value creation through this acquisition. Now I would ask the operator to open the floor for any questions, and we'll be happy, between Uday, Deepak and myself to address any of them.

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of [ Anil Nahata ], an individual investor.

For the international -- in terms of the geographies that they are having. Because the slide gives a breakup of around INR 153 crores, whereas the revenue is around INR 300 crores, if I understand, right?

Yes. So Anil, let me clarify that, right? That is the NLD business in those respective geographies, okay, which inputs the Tanla numbers, that is more to give you a sense of what is the domestic business that they do with local enterprises, okay. But they also do global business and ILD business out of these entities. So we are breaking it down. We will give you further details post the acquisition, in terms of the kind of business that they do. But we wanted to specifically follow -- see, there is a difference between serving the market and the entity being used to book revenues, right? So you could book a global to global revenue in Dubai entity or a Saudi entity. So we are specifically carving up what is the local business that we do. And that local business for the combined group would be about INR 153 crores. That INR 100 crores comes from ValueFirst and about INR 50 crores comes from Tanla. Tanla was only present in UAE. ValueFirst is present in all three geographies.

Great Aravind. Thank you for that. And can you also give some sort of the range around which the margins for the domestic business in the overseas countries is there, and the Indian margin for ValueFirst?

So if you ask me, the margins on the overseas business today is a little lower, Anil, right? It's probably breakeven or slightly 1%, 2%. And India is a little higher at about 7% -- 6.5%, 7%.

You're giving at the EBITDA level?

Yes, I'm giving at the EBITDA level.

Okay. Fair enough. My third question around this line is, of course, it may be a bit early to ask this question, but I would still leave it with you. Now that Uday has said that one of the large concerns that has been raised by the shareholders' community is about the international expansion. And ValueFirst can be a good step behind -- beyond what Tanla was already doing in UAE, in terms of getting into -- deeper into the KSA and Indonesia. I mean what kind of a plan we can see from Tanla over the next 1 or 2 years? Can we look at international revenue base of 10%, 20% of the overall revenue? I mean some sort of thought process would be -- I'm not even asking guidance. I'm saying what kind of a thought process can be there?

So Anil, you said, right. We've not even integrated the entities, right? But...

Correct. Absolutely.

But even we see a huge opportunity. In fact, we see clearly a huge opportunity. In fact, we've been talking about Saudi quite a bit, right? We've been talking about Far East Asia quite a bit, right? And the market sizes there are very, very large, okay? So the idea, obviously, and I think Uday mentioned this, is not just look at these geographies only from an enterprise side but even from a platform side. So the expectations and internal workings are quite aggressive, Anil, but it can be substantial, but maybe I'll wait to kind of have a much more detailed out plan in terms of what we are doing before I kind of comment what kind of percentage it can become?

Okay. I know it's ahead of time. And I mean, Aravind, if you are okay, can I ask more questions or should I come back in the queue?

No, I would certainly come back because I think there's a queue. Once everybody is done, if we have time...

Absolutely. Fair enough.

The next question is from the line of [ Deepak Chothani ] from [ Reed ] Capital Partners.

Congrats on this acquisition. Great move, which is surely be followed by Tanla's pole position in India. I have two questions. First is, I understand ValueFirst is largely into enterprise business. So I just want to understand, given Tanla's foray into IT platforms and other business, what could be the cross-sell opportunity to ValueFirst customers, more on the platform business side, number one. Number two, you mentioned that the international businesses can grow 2.5x in few months. Is that like few months -- I mean can you throw some light on this? And the third is INR 50 crores EBITDA is on INR 950 crores or INR 650 crores?

So let me answer the third question first. The INR 50 crores EBITDA is on INR 950 crores, right? We see that the EBITDA doesn't change because of intercompany. Only the revenue changes, okay? Both organizations keep their profit. It's just that the consolidated revenue comes up. That is why we feel that adjustment happens only at the revenue line, but not at the EBITDA line. So that's my first point, right? The second question is in terms of the...

Yes, yes, so platforms. So, Deepak basically like a couple of things, like, one is, for example, in India alone, only 50% of their traffic comes on to our DLT platform, remaining 50% goes to our competitors. So now going forward, probably from tomorrow, day-after-tomorrow [indiscernible] 100% of traffic comes to our DLT platform. That's number one, right? So number 2 is what we noticed is 40% of their revenues are net new to us, okay? So we are listing out all with their clients. And we are also working on how to upsell and cross-sell some of our Karix and Tanla services to these customers. So we are pretty excited and that we see a huge value there. And of course, in Dubai also, we have been operating for the last 2 years. We're reasonably big. We also see the clear opportunity out there, like in the sense like we have our own customers and they have their own set of customers in Dubai. So there is a clear opportunity for us to upsell and cross-sell them. So it's only beginning, there's a long way to go. But in particular we are really, really excited about this opportunity.

Just my one question which remains. The 2, 3x growth in few months in international expansion, can you throw some light on this, sir?

Sure. So when it comes to the NLD business that we specifically talked about especially where we have geographies like Indonesia where we have just made an entry. And if you look at that slide deck, right. You have a significant headroom because it's a very, very large market, right. So what we are planning, right, is to see how do we accelerate the growth in some of those geographies where we can quickly turn around and get up with our business. Obviously, we will assess in more details, and that's the kind of potential we are seeing Deepak, right? So that is our approach, specifically in these geographies where the base is small and we feel that if we can put our full might and our investments behind it, there's an opportunity to scale up. The specific segment is very, very high.

The next question is from the line of Meet Rachchh from Anubhuti Advisors.

Congrats on the transaction. So first question is in terms of margins. So in Slide #16 of the presentation, we have mentioned that there's an opportunity to improve 140, 150 basis points on a consolidated basis. So just wanted to know this is on the Q4 exit rate or the FY '23 average of 18%?

So I kind of talked about this in my opening remarks, right? So what we are seeing -- it is both in a way, it's just to say that our exit margin is around 20%. Okay? We have an ability -- I mean if you take the entire impact of the ValueFirst, the impact is about 200 basis points roughly, right? And we are saying over the 12-month period as we exit, we will kind of get that dilution back largely through the improvement in ValueFirst EBITDA, right, which we have talked about.

All right. Okay. Second question is in terms of the business, which we had earlier with ValueFirst. So can you elaborate what was the business we were doing with ValueFirst for the last 10 years?

Tanla has always been a very large platform provider, right? We've been a large platform provider. And we have served all of our big CPaaS players, right. Because our platforms are deployed at the telco end and our customers of Tanla historically have been with the CPaaS providers, right, in general. So in fact, interestingly, when we bought Karix, Karix was probably one of the -- or largest customer of Tanla at that time. So Tanla has been serving the CPaaS players, right, from inception. So that's the kind of, it's A2P messaging service, where we deploy -- I mean, they send the messages and we run it through our platforms in the telco.

The next question is from the line of Amit Chandra from HDFC Securities.

So my question is on the synergy benefits. So you mentioned that there is obviously a lot of synergy benefits that you're seeing. So if you can tell me what are the immediate kind of synergy benefits we'll see and what are the long to medium term synergy benefits? And also, I know you mentioned about pricing benefit that we can get as a larger entity. So if you can throw some light on that. And also, if I see the gross margins for both entities, they're mostly the same. So they announced -- so the difference is mostly on the EBITDA margin front. So the margin benefit we are talking about, is it through gross margin expansion or like cutting the cost at the Karix level? Sorry, at the -- on the ValueFirst level sorry.

Sure Amit. So let me give you my view and I'll request Uday or Deepak to add on, right. So what we are saying clearly is -- I mean, the first point is, at an integrated level, the gross margin of Tanla is upwards of 25%, right. For the year, it's 27% as we exit, right. And it's much lower for ValueFirst, right. There is no dilution in gross margin because when we do the consolidation in many ways the company revenue knocks out but the gross margin remains. So there is a significant gap in terms of the gross margin. Now 2, 3 elements there, Amit. One, clearly, is the sourcing cost, because there is a benefit that we can get as far as that is concerned. Two is, and I think Uday mentioned it, you have cross leverage through platforms that you have the benefit of -- you have multiple of our platforms that are deployed, not all of ValueFirst traffic goes through that. So we will definitely create some downstream benefit there. There will be certain indirect cost synergies that we will identify, and we've already identified, and we will execute on that, right? So I don't think the business is very different for us to operate at very different margin levels. That's the hypothesis that we are starting with. And obviously, with synergies around platform, et cetera, that they do not have, but we can get the benefit of that, it is easy for us to kind of drive the profitability improvement.

Yes. Okay. And sir, in terms of the customer overlap, obviously, you have given very clearly where the overlaps are. But if you can also quantify what could be the overlap in terms of revenues? And how do we see these individual customers which are common, in terms of spending, if there were in both the entities?

So Deepak, do you want to comment product on it while I can give some numbers, right. But from a contract perspective, if you want to give your color, right. I can provide the numbers.

Yes. So see, it's like this. We have overlap with some customers, and they are pretty large customers. But we don't see any risk whatsoever. The primary reason is that they're two separate platforms.

So why don't I cover that, Amit, until Deepak joins back right. See, one point, what we have mentioned is 40% of ValueFirst revenues is customers who're net new to Tanla, right. So to that extent, that gives you a sense, right. The balance of revenues are obviously having an overlap. No, not all overlap necessarily is bad, right. We have a situation where we can coexist. That is not an issue. We are retaining the brand. So to that extent, it's not that two of them will combine into one. So we don't see an issue. But what will happen is a huge ability to cross-sell, upsell, that Uday also talked about in his opening remarks, right? That we will have with customers. And that's where we see a big opportunity.

Why I was trying to understand this is, as you said that 60% is overlap. So that's a big overlap, right? So any risk you see to that in terms of some customer scaling down in one entity or some -- any kind of risk that you see in the overlap? So that's what I was trying to understand.

Deepak, are you there?

Mr. Reddy, your line is in talk mode.

Okay. Let's Deepak come back and answer that.

I'm there.

Yes, Deepak. Go ahead. Go ahead. Yes, yes. Sorry, Deepak. Please go ahead.

Aravind, would you please clarify about this 60% overlap thing?

Yes. So I think the question, Deepak, that Amit wants is where there is an overlap, do we see a risk of customer pushing out either of the player, right? Is there a risk that we will lose revenues because of whatever overlap we have? And I just kind of gave a headline saying we don't see that risk, but maybe you may want to elaborate a little bit on that.

All right. First of all, Aravind, it is not a 60% overlap of our business, between Karix and ValueFirst, right?

So from a revenue standpoint we did that. So it is 60%, in a sense 40% is net new. But what I mean by that is where we have even one message goes, right? We call it overlap, right? So we may not feel that it's an overlap, but it is...

Yes. So to answer your question, in fact, we have done this exercise, okay? And how it works is a customer usually have a minimum 2 or more than 2 providers. Okay? Maybe 3 or 4, large customers usually have 3 or 4 providers. Usually, the large customers Karix has about 45% to 50% share, wallet share, others have 20%, 30% or so on, right? As we see this, that for the customer, there are 2 separate platforms hosted in different geographies, different data centers. And our business -- services business is very people-oriented, so customers are used to dealing with a certain set of people in a particular provider. So if you look at all of that, I don't see any risk. In fact, we see a huge opportunity, where we can actually enter into ValueFirst customers, okay, where we are not present. And ValueFirst can come as another provider to our customers where they are not present, right? So I'm looking at an opportunity where we can look for incremental business rather.

Okay. And sir, last question is on the retention program that you have. So can you please throw some more light on how it is structured? Is it only for top management or it is across all employees for ValueFirst? And how the payouts will be?

No. So we talked -- no -- so we're doing an RSU plan is probably cover top 20, 25 employees there, right, with a focused view on how to retain. So we have an RSU plan for about INR 50 crores in ValueFirst, right? And that will vest over a 2-year period, for driving both retention as well as performance. So that is really how the incentive plan is structured, Amit.

[Operator Instructions] The next question is from the line of Mohit Motwani from Nuvama.

Congratulations on the transaction. I have a question on -- around -- can you give some sense on what led to you selling ValueFirst? I understand that Twilio works with you as well. But I believe that they wanted to enter India, which is a fast-growing market, and that's the reason they had gone the acquisition way, and they ended up acquiring ValueFirst. But what has led to them selling the business? And that also at a relatively lower valuations. It's good from Tanla's perspective that you are getting and you can turn around and scale and gain more market share. But just wanted to get some color on that if you can provide?

Mohit, Uday here. We cannot really comment on behalf of Twilio, but we are very, very excited. We understand this market well. We understand this terrain very well. So we have been working with ValueFirst for one decade. So we are pretty excited. So I don't know why they left and why they acquired, why they sold it and lost. We cannot really answer those questions. This is completely left to Twilio.

The next question is from the line of Sharad Kohli, an individual investor.

I have basically 3 questions, actually two questions and one suggestion. The first question I have is, in terms of the industry consolidation. So Karix was #1, ValueFirst was #4. So they have become part of Tanla over the last 2, 3 years. You basically have 3 sizable players left now, right, besides Tanla now, which is Route, Gupshup, and ACL which is Sinch. My question is in terms of negotiating your share of the cuts from the telcos, does this make the CPaaS players in a better position to get a higher percentage of the revenue share from telcos? That's my first question. The second question I have is more on the stats that you gave on the TAM on the Asian markets. The first clarification I have is, is the Indonesian market led by CPaaS players like Tanla or is it kind of like the Airtel model where the CPaaS divisions of the telcos control the market for the most case? And I'm trying to get an understanding of how easy or difficult it might be for a stand-alone CPaaS player to kind of make inroads if, in fact, the telcos are the ones that control the CPaaS market. And my last one, just given that we are absorbing so much data on the different markets, mid-market versus large market, one suggestion I would like to offer is when you guys present your numbers for Q1, is there a slide you can show where you look at each of Tanla's 5 businesses, whether it's Engage or Communicate everything, if you can just do a matrix, maybe a 3x4 matrix or a 4x4 matrix, where you say here are divisions, here's the -- here's which market we cater to, here's where our share in that market is -- revenue share of the market is, and here are the drivers of those markets, where that comes from, start-ups or BFSI, whatever it is. Because it just makes it easier to understand which segments each of Tanla's 5 divisions claim, in terms of just modeling out potential revenues. And if you can also disclose TAM numbers for each of those revenues. That's it from my side.

Yes. Go ahead, Aravind.

In terms of second question, what I can say is like if you look at any market, including Indonesia, it is completely driven by the aggregators or the CPaaS players, not necessarily by the mobile carriers. So it's a customer in every market, including India and other markets, right? So it's not different from any other market. So that's number one.

Sourcing?

Yes, definitely, it would be good to help us. Even now we have the better access to the telcos. And with this acquisition, like definitely that. So we have more power to negotiate harder with the telcos. In terms of the metrics, yes, definitely we'll consider that.

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Ms. Ritu Mehta for closing comments.

Thank you, everyone. That was the last question for today. In case we could not take your questions due to time constraints, please feel free to reach out to our Investor Relations team. Thank you.

Thank you. Ladies and gentlemen, on behalf of Tanla Platforms Limited, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.