Tata Communications Limited (TATACOMM) Earnings Call Transcript & Summary

Good evening, everyone, and a warm welcome to you all. Thank you for participating in the Q3 FY '25 Earnings Call for Tata Communications. My name is Sudeshna Patnaik, and I'll be your host for the call. We are joined by our MD and CEO, Mr. Amur Lakshminarayanan; our CFO, Mr. Kabir Ahmed Shakir; and our Head of Investor Relations, Mr. Rajiv Sharma. The results for the quarter ended 31st December 2024, have been announced today, and the quarterly data pack is available on our website. We will begin today's call with opening remarks from Lakshmi on the business performance and the business outlook, followed by Kabir on the company's financial performance. [Operator Instructions] Some of the statements made in today's call may be forward-looking in nature and are subject to uncertainties. The company does not undertake to update these forward-looking statements publicly. With that, I would like to invite Lakshmi to share his views. Thank you, and over to you, Lakshmi.

Thank you, Sudeshna. We're very pleased with our results for the first quarter, with continued growth in digital revenues coupled with improvement in EBITDA margins and free cash flows. Our strategic measures pertaining to the review of noncore assets and subsidiaries are yielding positive outcomes. We are on track with repositioning our assets to drive long-term value creation. In Q3, we entered into a share purchase agreement with TSI India for share of our entire stake in TCPSL. Similarly, NetFoundry, our fully owned subsidiary, requires additional investments to support its growth ambition and achieve its long-term potential. We are considering avenues to infuse external capital, which may result in us no longer being a controlling entity, while we continue to retain a stake in that business. Coming to our financial performance. Consolidated revenues came in at INR 5,798 crores and grew by 2.9% year-on-year and 0.5% Q-on-Q. Our EBITDA margins came in at 20.4%, improved Q-on-Q by 100 basis points. And our PAT came in at INR 256.6 crores, up 12.9% Q-on-Q. FCF came in at INR 841 crores versus a negative FCF of INR 194 crores in Q2. Please note that Q3 numbers do not include TCPSL and NetFoundry. Data revenues came in at INR 4,903 crores and were up 6.2% year-on-year and 1.4% Q-o-Q. Core connectivity revenues came in at INR 2,590 crores, a growth of 2.8% year-on-year and lower by 0.9% Q-on-Q. Internationally, cable cuts were an issue in the previous quarters that we called out. The repairs were completed in October. The later part of the quarter was about winning back the customers. In India, we continue to be market leaders in data center to data center connectivity and are investing further to sharpen our services with dedicated materials. On the order book and funnel side, our funnel continues to be robust. Large deal funnel addition has increased by 50% year-on-year, giving us the confidence that we are delivering on our strategy and being relevant to our customers. Our order book in H1 had benefited from marquee large deals and YTD order book growth is healthy double digit, and early signs suggest that 4Q is likely to be robust in revenue growth. To throw some light on the deals in Q3 in India, we are seeing increased traction in Hosted SASE. Internationally, we continue to add new logos in the form of national champions. In U.K. and Ireland, we bagged orders from a top retail bank and a global retail chain to transform the digital landscape. In the Americas, we started working with the world's largest manufacturer of construction equipment to support their operations overseas. Additionally, we are seeing more wins from existing customers in line with our strategy of going deeper with fewer. Coming to our digital portfolio performance. This quarter, our revenues came in at INR 2,313 crores at 10.2% year-on-year growth and 4.1% quarter-on-quarter. This growth is broad-based. Our collaboration and managed CPaaS portfolio, which is our Interaction Fabric, reported a robust growth of 11.7% year-on-year and 5.7% Q-on-Q. In Q3, we launched Kaleyra.ai to help enterprises uncomplicate their communications with their customers through work flows and templates powered by AI. We expect the adoption start kicking in a few quarters. Next-gen connectivity, which is our network fabric, grew 9.2% year-on-year,and 14.4% quarter-on-quarter. Customers shifting to cloud, shifting to Internet and adoption of AI are the key growth drivers for our network fabric, and we are capturing this opportunity through our IZO Hybrid WAN service, IZO multi-cloud connect service, both of which witnessed robust growth. Cloud and Security Fabric grew by 12.5% year-on-year and 4.1% Q-on-Q, driven primarily by our security portfolio. GPU as a Service is already available in the market. Our AI studio launch will come later this quarter. Our incubation services, which is our Fabric IoT, witnessed a growth of 23.1% year-on-year and a decline of 20.9% Q-on-Q. In the top line, there is an impact on account of discontinued operations. In the previous quarter, our new platform had seen an uptick, driven by the SOTA campaigns by OEM. These campaigns are periodic in nature. Having said that, we have extended our partnership with JLR. JLR is upcoming medium-sized SUV built on a new electric vehicle modular architecture will be leveraging Tata communications MOVE platform. Our media portfolio witnessed 2% year-on-year decline, an increase of 6.7% Q-on-Q. We signed a multimillion dollar deal with a LatAm-based media tech company. As a media cloud and edge technology partner, we will help them transform from a linear traditional channel format to a digital platform. To sum up, in a not so conducive environment, we have delivered a strong execution as reflected in our digital data growth, combined with expanded margins and increased cash flow. We will continue to invest in our products as we see our customer relevance is growing. With that, I now request Kabir to share the key financial highlights.

Thank you, Lakshmi. The Q3 FY '25 revenue growth driven by data came in at INR 5,798 crores. Consolidated revenue growth of 2.9% year-on-year and 0.5% Q-on-Q. The top line had certain ForEx benefits upcoming from a strengthening dollar, normalizing for the same, revenue growth is at 1.8% Y-o-Y and 0.2% Q-on-Q. Data revenue for the quarter came in at INR 4,903 crores, a growth of 6.2% year-on-year and 1.4% Q-on-Q. The digital revenues for the quarter came in at INR 2,313 crores, a growth of 10.2% year-on-year and 4.1% quarter-on-quarter. Last year, we emphasized -- last quarter we emphasized multiple strategic measures, which we start benefiting us in the quarters to come. And I'm pleased to share that we are making good progress. We announced the monetization of land parcel in the previous quarter and necessary shareholder approvals are in place. Similarly, TSI purchase of entire stake in TCPSL will help us lower leverage, boost margin profile and PAT in the coming days. As Lakshmi highlighted earlier during the call, we considering potential avenues of scaling NetFoundry by infusing external capital. This is another positive outcome of our strategic review of subsidiaries and help strengthen and sharpen our focus on core and aid margins. Let me add that our strategic review of subsidiaries has not merely restricted to monetization of assets. We've been working towards making TCTS more profitable and the impact on our profitability is already visible. TCTS EBITDA margins have improved by about 800 basis points year-on-year. PAT for TCTS has significantly improved from negative INR 42 crores in FY '24 to INR 40 crores until Q3 FY '25. This has been outcome of our move to come out of a large loss-making contract. Our measures towards simplifications continue as we undertake restructuring of the current layered corporate structure. TC Netherlands and TC UK have been identified as the preferred holding company for potential acquisition overseas, and steps are being taken to realign them as direct subsidiaries of TC India. This simplification will help the company to be more efficient and opportunistic in pursuing any potential opportunities when they come by. All the aforesaid measures are sharply improving the organization's ability to focus on the core and making us future ready, and at the same time freeing up resources to fuel our next phase of growth. With our land and noncore monetization stated above, we see our leverage ratios improving meaningfully over the next couple of quarters. Executing all the aforesaid measures was never easy as implemented -- implementation required upfront costs and may have created a perception of inefficiency. These decisions position the company for long-term success and operational excellence. Our EBITDA came in at INR 1,181 crores, up 4.1% year-on-year and 5.7% quarter-on-quarter. Our EBITDA margins for the quarter were at 20.4%, Albeit negative, the EBITDA margin of our digital portfolio continues to witness an improving trend. PAT for the quarter came in at INR 256.6 crores, up 12.9% quarter-on-quarter. FCF for the quarter was at INR 841 crores after being negative in the previous 2 quarters. This is the highest FCF, we have reported in the last 10 quarters. We are able to address working capital concerns this quarter, even though collection in some pockets of SAARC region has been challenging in the recent past, driven by geopolitical factors. Cash CapEx for the quarter stood at INR 486 crores. ROCE came in at 16%, a decline of 40 basis points quarter-on-quarter. Net debt for the quarter stood at INR 10,468 crores, and net debt-to-EBITDA is 2.34x. Both net debt and ROCE are impacted by ForEx. Net debt is higher by INR 200-odd crores and ROCE higher by 20 basis points because of the ForEx impact. TCPSL and NetFoundry are part of discontinued operations and therefore they are not part of the reported financials. As such, the top line for Q3 is lower by INR 36 crores. EBITDA margins have been positively impacted by 40 basis points and PAT margin is seen -- the improvement impact margin is seen at INR 20.7 crores. Net debt is higher by INR 267 crores due to noninclusion of cash from TCPSL. To sum up, our actions around repurposing our balance sheet combined with continuous investments in new capabilities positions us well to participate in future growth opportunities. I will now ask Sudeshna to open the forum for Q&A.

Thank you, Kabir. [Operator Instructions] The first question is from the line of Balaji Subramanian from IIFL. Balaji, you have been requested to unmute yourself. Please unmute and proceed with your question.

Am I audible?

Yes, you are.

Yes. My first question would be on the demand environment. We have seen especially with now the Trump administration coming in, some of the IT services companies at least are talking about an improvement in discretionary spending from the next quarter or so. So how does -- are you also seeing some sort of a similar tailwind on the demand front? That would be my first question. My second question would be on your FY '27 revenue target, the data and the digital portfolio revenue target. So now that we are just about a little over 2 years away from that time line. How do you see yourself achieving those targets? And then what is the visibility and how should one think about it?

Thanks, Balaji. I think the first question on demand, I think you referred to both the Trump administration coming in as well as the commentaries from the SIs. First of all, I think I have made the point before, the demand cycles of what you hear and see from the SIs are not directly related to us as we are in a digital infrastructure business. And to make that point, even in both our quarter 1 and quarter 2, we highlighted that our order booking had gone up both in Q1 and Q2, right? So even before that, I was saying that our funnel was robust. It was a matter of closing them. And we are very pleased to have closed in those days in Q1 and Q2. In Q3, our funnel additions have been robust, but closures is normal, I would say, like the previous years and not the increase that we had seen in Q1 and Q2. Our demand cycles are somewhat different to this and that's the first point I would make. Because in the biggest portfolio, both on the core connectivity as well as the next-gen connectivity portfolios, largely these are driven by the customers' adoption of cloud. They don't want to touch that infrastructure until something is broken. So the movements and the drivers of why customers go towards transforming are slightly different to what the SIs would say. I'm elaborating the point to just make sure that we can't directly correlate the 2 environments. Having said that, we are very pleased in this year, particularly about our ACV performance. Q3 has come back to the normal. Our funnel is still pretty good. In terms of additions, news deals into the funnel, were good in Q3. And as we are looking at more larger and larger deals, our closure time is taking time. I think that's more a function of us getting into a larger deal as opposed to necessarily the macro conditions, what I would say. So those are the main elements from what we see and how we see the demand environment to be. To your question on FY '27, I mean, as we said when we put out our ambition that we wanted to double our revenues. It is an ambition. That ambition was really underpinned by what we believe the enterprises were needing. And we still believe that those customers are -- will have the need to transform the network, will need a fabric that seamlessly integrates across network, cloud, security and all of these. And therefore we are continuing to invest in that direction, and we are seeing good traction. Now whether we hit that number is -- 2 years is to call out is difficult. It is, again, subject to many conditions in the macro. Even this year, for example, we anticipated a soft macro to -- and demand environment to be the way it played out. But I have confidence that we are moving in the right direction. We are investing in the right product set, and we are participating in opportunities to move us forward.

That was useful. And what about -- what is the time line by which you should be close to achieving your medium-term EBITDA margin target? If I do some rough math, it does appear that the annual loss that you are making in the digital portfolio piece, I do know that you have mentioned in the past that one can't kind of look at digital portfolio and core connectivity in separation. But if I look at it, it does appear that the annual EBITDA loss there is to the tune of INR 400 crores, INR 500 crores at least. So when can one expect these investments to normalize and make decent maybe high single digits or early teens kind of EBITDA margins? I'm just talking about the digital portfolio piece.

Yes. Balaji, let me take that question. I mentioned before, so I'll reiterate it, every business within the digital portfolio has their destination margin. They are in the lines that you have already mentioned. So they may vary from one business to another. And the second bit is that they have a glide path of getting there. And there are drivers identified how we'll get. Some of them will be volume and operating leverage kicking in, some of them will be when they actually scale up and then we are able to get into multiple geographies, some of them because of the cost-saving measures that we need to actually put in, some of them will be mix element. So there are multiple drivers for each of the businesses that we are actually tracking. So that's what we have that in the medium term, they should get to their destination portfolio. But having said that, I mean, in the digital portfolio, let's be open minded, that we may have to pivot and repivot ourselves depending on how the environment and how the customer demands are unfolding in front of us. And we need to be agile enough to be relevant to our customers, especially in the digital portfolio. So therefore, I'd like to, yes, have my eye on what the destination margin is and what the glide path should be, but at the same time be flexible enough that I stay relevant to the customers depending on the changing demand scenarios. So with that, I would say we are continuing in our overall margin ambition of getting back to the 23% to 25% range. As we said, we will get to the net debt to EBITDA this year, ROCE next year and EBITDA the year after, that's what we had mentioned. We continue to remain there except for net debt-to-EBITDA may slip by a bit, especially because of the high ForEx volatility that we have actually seen in the last 4, 6 weeks, and we are all aware of what's happening to the dollar. As a result of that, the ratios do have changed. Fundamentals of the business haven't changed anything, so it may slip by a quarter or so both on the debt and on the ROCE line. Plus the corporate action that we have taken, for example, payment solutions. On its own, that's the right thing to do for the business, but that means INR 267 crores of cash has gone and therefore, net debt has gone up. Those are mathematics, Balaji. They don't change the fundamentals of the business or the value-creating action that we are doing each of them to get this business robust. So we are still committed to that and I'm really not worried if it changes by a quarter here or there because of macro conditions or external variables.

The next question is from Sanjesh Jain.

Can you hear me?

Yes.

First, on the digital services, now that the Kaleyra is in the base, the growth of 10% appears to be significantly slower. What is really stopping us because underlying driver really hasn't changed much, whether cloud adoption network transformation. I can understand slowdown in the CPaaS, but rest of the businesses, the fundamental really hasn't changed. So what is dragging us behind in the growth for the digital services? And what really will it take us for it to accelerate over 20%, 25%, which was the goal set for the organization?

Yes. So Sanjesh, firstly, you're right, the interaction business is a fairly substantial part of the digital portfolio now. And the Interaction Fabric on year-on-year basis has grown 11.7%, which we believe for that category of business is quite good because there has been a general slowdown on SMS and others. The drivers for that business to further grow will come and the adoption of other channels compared to SMS starts to acquire scale. So that is one driver. The other -- the second driver is essentially move it to a MOVE platform in terms of more AI-based orchestration and so on. And that is what we are investing. So that will happen in sequence as the adoption of that happens, the interaction business growth and margins will begin to improve. In the remainder of the digital portfolio, the entire -- the next-gen connectivity has grown well. But for that, the order conversion it takes much longer because when a large international network transformation, it does take time either because it's like customers say, it's live wire and we are touching the live wire for them. We have to be careful and they are ultra careful. And second is also they want to do that region by region, and it takes time to deliver, and therefore, recognize the revenue, right? So that is the kind of sequence that we have to go through. We see traction, but the conversion to the revenue does take time. And I called out in the next-gen connectivity, we have grown well. And we are further investing in the new drivers, which are the cloud connectivity portfolio, which is very early stage in the market. The overall market is still only $1 billion globally. In that market, we are -- and that is seeing a very healthy growth, but that number growth, even if it is a 30%, 40% growth, is not going to shift the needle on the overall digital portfolio. So you're not able to really appreciate the growth in that portfolio. If you look at our cloud and security portfolio, cloud is largely in India. Yes, they've had somewhat of a lower growth there. I would put that growth to market, as well as the customer-specific churn that we had in that business. But the security business has grown quite well. And we had called out winning some large deals in the first half of the year, and we will see some of it panning out as soon as next quarter. So I think the drivers are exactly the same. I think we are investing in the right areas and we expect that we would gain more traction as we go along.

Thanks, Lakshmi. That's fairly elaborate. But considering where we are today sitting on the order book and sales funnel, how does FY '26 look for us? Do you see these challenges continue and difficulty as an organization to accelerate the growth?

Yes. I mean, as you know we don't give guidance. But the only indicators I would see, there are certain tailwinds, which is the acceptance in the market of our products and platform, the growth in the funnel that I called out and the increased order booking that we did in the first half of the year. And we hope that it will pick up in Q4 again. Q3 came back to more normative levels. So these are the tailwinds we see. And similarly on the headwinds side, we do have headwinds particularly when it comes to the connectivity business, there is price erosion. There are churns that happens. And this year, we suffered from cable cuts, which was a substantial pull-down in terms of the numbers that you would have had. So there are some headwinds and tailwinds. So it's difficult to call out what FY '26. And when I say, beyond these indicators, we don't want to give any guidance as such.

No, that's fair. That's fair. Just one follow-up. We have done a lot of investment, whether it's product portfolio, foot on the street, putting up a huge investment on the employee cost and all. Are we satisfied with the progress that we thought when we started this investment in terms of how we are moving today?

Yes. I think the clear reflection has increased the order book that we reported in first half would not have happened if we have not invested in expanding both our product portfolio as well as investing in the right type of sales resource in the markets. Now the question is in order for us to grow and further accelerate, we believe, despite our international business has grown quite well even this quarter and this year, year-to-date has grown, but in order for us to grow in the international markets, our footprint and coverage needs to substantially even more increase, right? And that we are taking very measured steps rather than incurring all costs upfront because we are having to balance the cost incurred how long will a person take to become productive and the results that they deliver. So these are more measured steps you take. But clearly, our presence would have to increase even more in order to grow faster.

Fair enough. Lakshmi, just one on the cloud. We were very bullish on the cloud part of the business. We have announced certain new products as well, and that we are taking international unlike the existing cloud business, which is more India specific. When should we see acceleration in the order win on that part of the business?

On the cloud, we did not say we are doing international, Sanjesh. Cloud has always been India. We do have some cloud presence internationally, but we have not really scaled that or invested further in the international side. We do have some customers that we support. What you perhaps are referring to is the CloudLyte portfolio. And the Edge portfolio is -- our first biggest proof point of the Edge that it works is our media cloud business, right? So the media cloud, even the large LatAm deal that we announced. We will use our Edge portfolio, specifically tuned for media, for that transformation of that business. So it is seeing traction. We have to -- currently, the only major use case is media that we have. So we will look at other use cases for manufacturing and retail, and then we could scale that in those markets.

And then AI Cloud, there also we started investing, right?

Yes, yes, AI cloud is -- we have been investing. I think we're very pleased. We said that we will have it ready this quarter. Earlier last week, we announced GPU as a Service for general availability for customers. The AI Studio, which is the platform capability on top of the GPU, is something that we would launch later this quarter.

But traction in those will take some time before we see more order booking coming in from these services, right?

Yes. I think it's -- particularly on the enterprise side, people are still going to be in the experimental and learning mode, and then they have to graduate to adoption and scaling. So that will take time. There is a class of customers who would want to invest in model building and so on. Those would be the first set of customers where you would expect more scale usage.

Got it. Got it. How -- does this rupee depreciation -- a stark rupee depreciation help us become more competitive in the international market?

Let me take that. Not really because our price is always dollar-denominated. Our costs, our O&M are also dollar-denominated. So they do have a bit of -- sorry, time lag, and therefore, you see the reporting stuff. So on the top line, we this time had a bit of a benefit on ForEx. But on the cost line, on the EBITDA line, it was very marginal. It had a little bit of a severe impact on the net debt line, right? But then after a point in time, they normalized, Sanjesh.

Got it. Kabir, last question on the land sale which we were trying to do with INR 800 crores to INR 1,000 crores. When is that expected to close and cash flow to come in?

Sorry, did you say INR 2,000 crores?

No, no, INR 800 crores to INR 1,000 crores.

No, it's INR 850 crores to be precise is the gross amount. It's expected to -- the shareholder approval is in place, all other condition precedents that are required are already -- everything is completed. So we hope to do that deal in this quarter, and the monies will come in this quarter. I mean we have already recognized the DTA for that in the current Q3 already. So you'll see the money is coming in, in Q4.

Sir, just one follow-up squeezing in for that. Now that there is a huge demand for data center in India, should we see more land sale coming up, say, in FY '26?

Listen, what is data center got to do with land sale? I didn't see the connection, Sanjesh. But anyway, I would say we have an asset monetization plan. And as said [Technical Difficulty] here and there, which we have been selling for the last 2 years. This was the one big one, which had title issues associated. It took us almost literally 18 to 24 months to sort it out, and we were in a position to then sell it. There are couple of other parcels, which are on our radar now. And as and when the title and other regulatory issues and like classification and all those things are cleared, then we will get into the discovery mode. Some of them may be amenable for data centers, but some of them are probably very prime properties in the middle of cities, which may have better monetization and use case. So that is left to the buyer that who want to buy. We will do a discovery and try and get the best price for our shareholders.

Got it. Got it. My only reason to connect it with the data center was that there was a classification issue on a significant part of the surplus land.

Correct.

And hence, the data center demand meets the classification issue and that was the reason why I was...

We'll look at -- see, we're going to put that up and if there is a data center provider who is able to give us the value better than somebody who wants to build residences or malls, I'm completely independent of what it is. We will go for the highest value.

The next question is from Vibhor Singhal from Nuvame Equities.

Can you hear me? Am I audible?

Yes.

Congrats on a decent performance. So my question was mainly on -- Lakshmi, my question was maybe on the commentary by the IT services companies that have happened in this quarter, I mean starting from the TCS at the beginning of the quarter, I think almost all companies are talking about kind of a renewed environment -- demand environment in the U.S. and the discretionary spends coming back and green shoots in various basically domains. Where are we in that entire scheme of things? I mean, are we also seeing some of our clients or prospective clients talking positive about those things? Does any of that rub-off effect have on any of our segment verticals, which could help us take our growth to higher levels than what we are reporting today?

So Vibhor, I think I sort of clarified that making that commentary to our business may not be -- it's not directly relatable for various reasons because we are not in the application space. A large part of our portfolio is still network even if it is core connectivity and next-gen connectivity put together is still a very large part of our group. And in this portfolio, the demand drivers clearly are as there are more migrations to cloud, as people want to move more to the Internet. And now with AI, the data is going to become even more important as to how they manage and store and utilize all of these, the demand for network transformation is definitely going to be there. Having said that, how it translates is something that we have witnessed in the last 2, 3 years is it's really like a live wire, people take a very conservative approach in touching that and transforming that, and that will still continue. I think the only positivity I see is as people build more applications, there is going to be more data being transported and therefore, the network would have to transform. So it would have a -- when it would happen is not a direct correlation. Second data point is even before others started making positive commentaries, we said that our H1 order book, we said was much, much better than the previous years, what we had booked in H1. So I'm just making that point to say that it's not directly correlatable. The only area where we think the discretionary spend will benefit is one in our interaction business because some of the marketing campaigns and others are discretionary, and that could go up and that could have a direct impact to our interaction business, and that is where we are further strengthening with our Kaleyra.ai product that we launched. And the second area of the discretionary is more on the IoT Fabric. Again, that also depends on more discretionary budgets is what I would say. The rest of the hybrids are more fundamental and is not directly related to the environment that the tech guys would describe.

Got it. Got it. That was really helpful. So if I take it, let's say, I mean, the cloud business is predominantly India, cloud adoption India is probably going to take place whenever it does with a lag, that's different. Next-gen you mentioned its network and will probably happen with a lag in some time. For the CPaaS business, I mean, to be honest, a very decent growth in this quarter. How do you see this growth playing out? I mean, what could be the triggers that would further up this number to, let's say, a mid-teen kind of a growth number on a Y-on-Y basis? Are we seeing more adoption of new technologies in which we have offerings for clients? I mean, some color on that will be really useful.

Yes. No, we have diversified the channels to voice, RCS in some markets we are launching. The WhatsApp, in some markets we have launched. So we would make more channel diversity available in many markets during the course of the year and that would be one of the triggers for growth. The second trigger is, of course, the platform that we are building on top of the channels, right, in terms of more intelligent orchestration and all of that. And that would be the second trigger. And we are at the moment in very sort of early stages in terms of pushing that into the market. So we believe that, that will gain traction. And we will report on how that traction goes and how that growth is. So those will be the key drivers for the future growth. SMS, we can take market share from other places, but it's still the overall SMS market is not growing as much as it used to. And also from a margin perspective, that is not a great driver of margins if you stay in that SMS alone.

Got it. Got it. That's very helpful, Lakshmi. My last question is for Kabir. Kabir in terms of the margin profile, I mean we are gradually expanding our margins on the consolidated level. But if I do the back calculation, I think, as I think one of the participants also asked, our digital margins still appear to be in the red. I know you don't give separate guidances for separate divisions. But what will it take for our digital margins, let's say, to become profitable and get into that green territory? I mean the growth, to be honest, this quarter, we have grown almost 10% on a Y-on-Y basis in the digital portfolio. I mean do you need that growth to go up to a much level? Or do you think there is some base effect that will come into play or are we very close to that, and that irrespective of the growth numbers at some point of time, we should be able to reach that? Any color on that would be really helpful.

It's growth, growth. I can't focus more on digital portfolio. Our biggest focus of the entire top management is driving growth. So we do not want to starve the business of the investments that it needs. So therefore, if we need to pivot and repivot, sometimes we challenge our business models and say, should we do it differently and we learn from it and adapt. We will continue to do that. And therefore -- and even in digital portfolio, just because you don't have the scale doesn't mean that you will not add feature sets. So you have to be relevant from your offering as well. So it is not about saying, okay, I have invested already in the past. So let me pause and not invest further in product capability. So therefore, Lakshmi mentioned, we've launched Kaleyra.io (sic) [ Kaleyra.ai ] this quarter. I mean that is essential. Just because I've launched Kaleyra.io (sic) [ Kaleyra.ai ], will I be able to take my price up? Suddenly, I don't know. Hopefully, we can. But that helps me stay relevant in the place. So see our own ambition is that this part of the portfolio should go significantly higher than what we have grown this quarter. I mean obvious reasons, and I want to still feel happy about this growth, given the context and given the relative market situation and overall demand that we have seen in the last 2 quarters. But having said that, our ambition, whether it's from the FY '27 that we talked about or even otherwise, that it knows -- has to be growth. And when that growth operates at that particular level, you can do the math yourself because a large element of the costs are fixed in nature. So automatically the EBITDA profile will improve. So therefore, for that to take short-term myopic decisions, it's very easy to cut investments, but I think we should purpose our energies as an organization in driving growth.

So just to dwell a bit on that more, Kabir, does that also mean that in terms of, let's say, margin expansion for individual, let's say, CPaaS or media or the cloud vertical, the main and probably the only lever that we have for margin expansion is growth and the other operating levers in terms of cost optimization and all, they have largely been exhausted?

No, I'm not saying that. But -- sorry.

No, I think -- yes. No, we still have the cost levers available in those businesses, Vibhor. I think we are -- will work on some of those levers, especially some of the digital businesses which operate more internationally, some of the businesses that we had done acquisitions. So if you go to the EBITDA, after we did the acquisition, we used to say that if you look at our core business, including what we defined as a core as including the digital portfolio pre-acquisition, right, Switch and Kaleyra, we said our margins were at around 23%, right. That is still the case. We are -- our margins of our core minus the acquired entity are still at the 23% despite the investments we made in business in cloud and security, in IoT and other areas. So we believe that -- but even in those portfolios, we have levers available. So for example, in the cloud business, everybody knows that the whole market was hit by an increase of cost on VMware, there were cost increases. So we are balancing -- so there are levers available in each of those businesses for us to further optimize and we are working on those. On top of that, the revenue growth will truly bring the operating leverage on top of it. So we will be operating on both aspects of driving efficiencies in this business while securing and protecting the investments that we need to make, at the same time in order to drive growth.

The next question is from Hitesh from HDFC Life.

Sir, just to clarify, this cable cut thing, other things being equal, should we see the impact -- revenue increase impact in Q4? I assume this has been sorted by October. So should we -- other things being equal, should we see the revenue increase in Q4?

Yes. No, I think I mentioned in my commentary that we are in the process of winning back some of the customers from the cable cut. Then we have to get that traffic back and then the revenues would come. So we don't want to directly correlate to that. But having said that, overall, the core connectivity revenues this year is muted compared to the previous years, owing to the cuts that we suffered. And hopefully, that will come back to the previous levels. The only caveat that I would add in this situation is, overall, the core connectivity internationally, the core connectivity as a market is a declining market. And in that declining market, we have been growing and taking more market share. So while compared to the previous years where we had grown the core connectivity by 6%, it's come down to between 2% and 3%. We think it can go up, but it depends on how the markets will play out.

Just the other bit -- just sort of trying to understand better if I've understood correctly, our success rate or conversion run rate has come off in Q3 versus what we've seen in the last 2 quarters or versus what was seen in H1. So is that correct? Is the understanding correct? And secondly, what...

Sorry, before you go to the second question. I just want to clarify, I didn't the first question. What did you mean by in Q3, something has come off?

Our conversion run rate or our success run rate, deal conversion from funnel to...

In the order book you mean, yes.

Yes, yes. Okay.

Yes. What I was mentioning was...

Does that mean that success ratio come off in Q3 versus H1?

The win rates are still -- win rates have not really come off. It doesn't mean that in Q3, we lost something and so on. There are some deals that are sort of overflowing into Q4, but that funnel continues to be quite good. I mean in terms of order booking, we cannot be that precise on a quarter-on-quarter basis. So I don't see the quarter 3 order booking coming to, more to FY '24 levels is what I said is not indicative of our ability to win our conversion ratios or a win rate has come down. In fact our win rates are still pretty good. Has gone up. It's just some of the delays and some of the deals rolling over to the next quarter is what...

So the cycle has elongated slightly.

Yes, cycle. I mean, it's marginally gone up. It's not very material compared to the last quarters from what we -- on an average, when you look at the large deals, we used to be at 7 months, now it's 7.4 months. So it is not as though it's elongated. But in some of these things, if a deal runs over rather than closing on December 15, they close it on January 15, I wouldn't read too much into it.

And when we've got the -- when we say we've got a double-digit order book growth versus last year, when does it show on revenue?

Yes. That's a more complex question to answer because many of these have different conversion time to revenues. But I did say some of the deals, which are more in the area of the cloud and security that we announced in Q1 and Q2, we should start seeing that in Q4. Some of the network deals will take longer to fructify. If it is in the core connectivity, for example, we're doing a dedicated build, that might take almost 12 to 18 months to show up, so -- as revenues.

Okay. And just for a better understanding, of the order wins that we have, what proportion would be in India and what proportion would be outside India?

I don't have that handily with me. And that is not a data point that we also have given out before. So I don't want to start something new.

The next question is from Dayanand Mittal.

Just one question. What are the key factors that is driving margin expansion? And where do you see margins over the next few quarters?

Yes. I mean I don't want to give any specific guidance on margin per se. I mean we use -- our ambition is 23%, 25%. We were at 23% to 25%, and we came down as a result of acquisitions. So there are combination of multiple things that we are doing. One, each of those acquisition assets need to deliver on their business cases, which have built in synergies and margin expansion on their own. Our own core business needs to also grow and we need to have mixed benefits there and operating leverage to kick in. So that is another driver. But there are also going to be BAU of inflation and headwinds that we will face, and you need to mitigate that and then continue to grow. So I would say it's a mixed bag of multiple things that we are looking at on an ongoing basis. And in -- our ambition is in 2 years' time, we get back to the 23% to 25% using a multitude of these levers that will play out.

The next question is from Riddhesh Gandhi.

In the U.S., Lumen Technologies benefit a lot from just the overall positioning as a sort of provider backbone for AI. I understand that we don't have as strong a networking in the states. But do we see potentially this being an opportunity in India and some of our other markets actually where we are strong?

Yes. Riddhesh, I think even in today's commentary, I mentioned that we are a market leader in DC to DC connectivity in India, right? Internationally, the core connectivity has been on the decline, and we have been growing. So we have been doing relatively well with focused investments and capabilities and delivering a network that is reliable for the DC to DC connectivity and for large enterprises who require large pipes, both nationally and internationally. So that is the business that has been growing for us 6%, 7%. While we had initially said that it will be in mid-single digits or low single digits, based on how the overall market growth or degrowth is happening in the international markets. So just to give you a perspective, so definitely, AI and Lumen has seen that on the back of large investments by hyperscalers for AI cloud in the U.S., Lumen has benefited through the large order bookings there. And that is precisely what we have been doing in our core connectivity as well.

Got it. And then just to understand on your commentary on your FY '27 aspirations, which you spoke about, is it that now it's sort of looking difficult or it is still a target, may slip by a quarter or 2?

No. I think I've been saying that, that is an aspiration that we set for ourselves based on the -- based on which we were going to invest in products and increase our relevance. I think we are still continuing to do that. The traction and the feedback from the customers in the market is very positive on the digital fabric. So we'll have to continue to stay the course on that. When it will actually transfer, it depends on several factors that I've outlined and those need to play out.

Got it. And just to understand from the time in which we sort of set this aspiration and now, actually -- because I'm sure you guys would have done a lot of thinking into putting that aspiration out there as well. Actually, I mean, what has sort of like not played out as you had sort of expected to -- for us to achieve the aspiration?

One is still in the macro condition. The overall -- the geopolitical uncertainties and the demand environment has gone down all over the place, and that is something that we cannot anticipate for.

Which area of macro uncertainty, is it -- I mean, which area has been impacted by the macro uncertainty perspective?

What do you mean by which area?

No. As in, you're saying that the reason why the things which have changed is the macro uncertainty. But how is the macro uncertainty going to materially move the needle with regards to us potentially achieving what we were looking at?

So that depends on the spend environment, right? So the customer spends more on applications, there's going to be more need for data. As customers spend more on applications there are going to be more data islands, so the networks have to transform. So it has a bearing on how our customers would see us and would buy from people like us.

Got it. But the IT spending angle of things, stuff hasn't been reduced. Then in turn, the application would continue and turn -- sort of we would also continue to benefit. So -- and we haven't seen that happening in IT services. So just wanted to understand the reason we're seeing this year.

But even in the IT, there's been a slowdown overall. It's no longer in the big double digits that people are talking about.

Yes. No, no, but I'm saying that -- okay. And so in the event that let's say, with regards to our aspiration, is it just ultimately a question of maybe a quarter or 2? Or it could take an extra kind of year or 2 to reach the aspirations? Or how will you reset this application -- this aspiration, given what we know today?

Yes, I'll come back. We'll come back. I think we have an investor meeting coming up later on during the year, and we will have a better sense by then. We have another quarter to go because it is too early to call it quits.

Got it. So we're still aiming for it and hoping for it, okay.

Absolutely.

The next question is from Nitesh Rathi.

How should we think about this quarter, right? Because it's after 4 quarters that we've seen very strong, broad-based quarter-on-quarter growth in the digital portfolio. So I know almost 6% Q-o-Q growth and across the portfolio on the digital side, barring the incubation piece side. So is that the right way to look at it? Or should we look at it more on a Y-o-Y basis? Because the last 3 quarters are in the base and this growth has come in a seasonally weak quarter, and you're saying the full benefit of the orders that you've won in H1, have not yet kind of transpired, right? So I'm just trying to understand what is the right way to think about it? And is it unfair on my part to kind of think that what you've delivered in Q3 should kind of sustain or kind of improve going forward on a sequential basis?

I think the way to look at this quarter is the overall digital growth as you mentioned in the current environment is quite good, the year-on-year growth as well as the quarter-on-quarter growth. I've also called out the individual portfolios, and we've had good growth on the next-gen connectivity, on the cloud and security asset, albeit more on the security side rather than the cloud side. Our Interaction Fabric has grown double digit on a Y-o-Y basis. So we've had a -- and even our IoT Fabric, while there's a Q-on-Q decrease, year-on-year there has been a good increase in that business as well. So I think on the digital side, definitely, it's been a good quarter. And the -- some of the orders that we won in H1 and H2 would have got reflected in this quarter itself. But next quarter, some of the larger deals that we booked, the translation of that, we will start seeing in the next quarter, is what I mentioned.

Yes. So in that context, because the year-on-year numbers have a very big bearing of the last 3 quarters, which were subdued. And if I annualize the growth that you have delivered in this quarter and is annualization wrong is the question I'm asking you? Is there anything abnormal in this quarter, which you believe may not continue going forward? Because the order books are there, our relevance is increasing, the market is there. What should lead to that not happening going forward?

I think -- see, the annualizing doesn't really -- the reason being, I think I mentioned the tailwinds I've been talking about, right, the order booking, the funnel being good and so on and so forth. The headwind really is the -- especially on the network, including the next-gen connectivity, is still a very large part of our business. Close to about 60% is on the core and the next-gen connectivity put together. That business particularly is subject to price erosions and churn, and customers might -- especially if you take an IT customer or a BPO customer of ours, if they lose a customer, then that network connectivity goes, right? So there are network terminations that happen. But a large factor is also the network price erosions that happen. Those are the headwinds that we have to worry about, and that's the headwind that we constantly battle. So the reason why I'm giving you that explanation is in this business, annualizing the quarterly revenue and extrapolating on that is not the right way to look at.

No, no, I fully agree with you. It may not be the right way. I'm just saying in context that we lost a month with cable cut, we have a better -- the currency is in our favor and the fact that we booked very strong orders in H1. So I'm just trying to understand the caution, where is that caution coming from. But maybe it's fair, these are...

There is no caution. I mean I'm just giving you both plus and the minus side. The plus side is clearly the orders booked. The plus side is clearly the -- currently, we see a lot of -- last year, we saw a lot of DC-DC growth in India. We are the market leaders. As and when more comes, we will capitalize on those. In all of the portfolio, I think we are investing in the right places to be able to grow. The caution -- along with that positive, I'm also saying what the headwinds normally are. That's what I'm bringing both pluses and minuses to be clear.

No, absolutely. Got it. Okay. And can you just also help me understand how should we think about -- if data localization were to happen, what are the parts of the businesses that could see -- could be positively impacted? Or what are the possible impacts that could be there on our business?

No. Clearly, the cloud business will benefit if there is more of a mandate to localize.

Okay. And the connectivity wherein you said the data to data connectivity is also...

I think if there are more -- there is a cloud growth and there is more data centers in India, then the connectivity also will benefit from...

Understood. And last quarter, you called out that your international order book was at an all time 5-year high, right? Order booking, I think, if I'm not mistaken. Has that trend continued? Because you called out some very interesting deals that you won, the international bank, the international retailer and some very interesting customers, so has that momentum continued? Are you seeing increased traction in that piece out there?

Yes. I think the international funnel is quite healthy. And year-to-date, the order booking also has been healthy. I think the thing is the international regions, those regions are still relatively small for us. So even if those regions grow at 25%, or year-to-date, I've seen most of the regions have grown at a very healthy double digit, it's still -- in terms of how it shifts the needle for us overall is still a question. So -- but in terms of the traction that we see, we surely see traction in all the markets.

So are there some international regions? Because if you are seeing 25% -- international is, if I'm not mistaken, around 40% of our business, right? So if that is growing at a very healthy pace, are there some international markets which are seeing headwinds?

The international is also in 2 parts, one is the enterprise and also we have in international, we have the service providers and we have the OTT business as we call, right? So all of that is international. So the international enterprise is doing well. The OTT, after a lull, has picked up. So that would be the broad commentary on the international side.

And lastly, are there any plans to invest in cables again because a lot of our cables are starting to near end of life, are there any plans to kind of invest in cables?

Yes. We are -- we have been investing quite regularly on the cable side, right? So we buy -- whether we may not invest directly as a consortium partner or build by ourselves, but we are investing through IRUs. We just had one of the cable systems go live recently. So we are continuously investing and monitoring the capacity requirements of our business. And in fact, in the last few 4, 5 years, our capacity has gone up quite high. So there is a constant investment that we are doing on the cable systems.

Sorry, you said one of the largest IRUs went live. This happened in Q3 or in Q4 now?

Cable systems.

Yes, the cable system that went live, that is in Q4?

Yes, it's just gone live.

Given the constraint on time, we will end the question-and-answer session now. With that, I request Lakshmi to please share his closing comments.

Yes. No, thank you all. I think we are very pleased with the digital growth. The overall international growth has been a good all-round performance. Our performance on EBITDA has been quite good. And also the EBITDA to cash flow conversion is also very good. So we're very pleased overall with the quarter. Thank you.

Thank you, Lakshmi. This brings us to the end of the call. In case of any queries, please write to [email protected]. Thank you for joining the call, and you may now disconnect. Thank you. Have a good day.