Xelpmoc Design and Tech Limited (XELPMOC) Earnings Call Transcript & Summary

Thank you, sir. Good evening, friends, and thanks for joining the Q3 FY '21 Earnings Call for Xelpmoc Design and Tech Limited. It's a great pleasure to host all of you in this call today. The results and the investor presentations have been mailed to you, and is also present in the BSE website as well as our website. In case anyone has not received the release, please do write to us and we will be happy to send the press release and the presentation to you. To take us through the results and to answer your questions, we have the management of Xelpmoc represented by Mr. Sandipan Chattopadhyay, MD and CEO; and Mr. Srinivas Koora, the CFO of Xelpmoc. Mr. Srinivas Koora will start the call with a brief overview of the quarter gone past and after that, we will throw open the floor for Q&A. The standard safe harbor clause applies. And with that said, I now hand over the call to Mr. Srinivas Koora.

Thank you, Ravi. Good evening, everyone. Welcome to Xelpmoc's earnings call for the third quarter of fiscal 2021. I hope you and your family members are healthy and safe at home. I'm pleased to share with you that we maintained our revenue momentum, along with our focus on profitable operations. We continued with our execution built on identifying opportunities in sectors that fit our growth strategy. Our operating revenue for the quarter was INR 35.3 million as compared to INR 34.7 million in Q2 FY '21. On year-on-year basis, we grew by 65.6% as compared to INR 21.3 million over the corresponding period last year. Operating EBITDA after adjusting for ESOP for the quarter was INR 11.5 million as compared to INR 14.9 million in Q2 FY '21 and a negative INR 4 million in Q3 FY '20. EBITDA margin was 32.6% as compared to 43% in Q2 FY '21. As we had alluded in our previous call, due to the lock down, there was substantial fixed cost and nonoccurrence, which have resulted in abnormal high EBITDA margins in the past few quarters and is now gradually coming back to the expected range. Net profit for the quarter was INR 10 million after considering INR 30.7 lakhs of ESOP expense as compared to INR 15.6 million in Q2 FY '21, while it was a net loss of INR 1.6 million in Q3 FY '20. In continuation with Q2 FY '21, a greater portion of our revenue came from international clients as a result of our hard work in past few years for revenue diversification. Our team size is 110, inclusive of employees, interns and consultants. Till date, we have served 43 clients and our successful results on our continued engagement with our clients. The fair value of our investment in portfolio companies stood at approximately INR 443 million as of December 31, 2020, as compared to INR 292 million as of December 31, 2019. Our portfolio companies have done well by quickly capitalizing on emerging opportunities. One of our portfolio companies, Fortigo, has grown exponentially in the past couple of years. The pandemic restrictions reduced considerably vis-a-vis the previous quarter though moment restrictions continued in Kerala and Northwest. Metal and mineral segments picked up with sign up of 2 large companies. Like every year, December was marked with the sign-up of multiple large corporates. Subject to the continuity of the current trend of the receding pandemic, especially with the COVID vaccine rollout and substantial improved business sentiments, it is expected that we're on track for the next level of growth starting from April 2021 onwards. The other portfolio company, Mihup, is doing pretty good. In last few months, their product virtual interactive analysis generation has been rewarded with -- while conceptualization and execution of [ V8 Gen 2 ] has already begun. On the clientele front, they are associated with Tata for heavy auto has been extended to Gen 3 as well. Recently, they have onboarded 2 large new customers for VIA, which is virtual and interactive analysis. Woovly, a social commerce platform for lifestyle products have acquired 3.4 million registered users and 14,000 plus home-grown influencers. 76% of Woovly users are acquired via organic or unpaid channels. 5,000-plus influencers have made money in last 90 days through their brand-tagged content, which led to sales of $70,000. 30% of the U.S. have written more than 750,000 content with the brand tags. 85% of the users are typically buyers of lifestyle, fashion, gadgets, fitness and entertainment category. Woovly is on track for ARR of USD 750,000. Further to our earlier communication on investment in Catailyst Incorporation, we have applied for Class B common stock without nonvoting, which is preferentially convertible to Class A common stock with voting rights during Q3 FY '21, and the same is under allotment process. Now I come to the forecast for the fiscal. We see a promising growth in our portfolio companies, given that they are concentrating on hitherto unaddressed areas of the economy. We expect our key investments, including Fortigo Network Logistics, Mihup and Woovly to scale up into next leg of growth. We are also optimistic of our recent investment to deliver technology solution in education, health, insurance and agriculture and deliver long-term returns. We'll reiterate our outlook on being EBITDA-positive in FY '20 -- FY '21 and excluding ESOPs. We further retain our cautiously optimistic outlook, given the current challenging times, limiting the opportunity to bring onboard new clients. With this, now I request the moderator to open the floor for Q&A.

[Operator Instructions] The first question is from the line of [ Ram Kumar R K ] from -- who's an individual investor.

I'm very proud to be an investor in this company. My questions are, I have 2 questions. The first one is regarding -- you have 110 employees, you mentioned in the investor presentation. How much percentage of the 110 members are being billed directly to startups? And how much is percentages retained for the Xelpmoc core business? And you could let me know whether they are -- all of them are being billed directly to employee expense and retained from the startups? Or they are not shown in the employee expense, I mean, indirectly, it's coming through billing their startups. That's the first question.

Okay. What's your second question?

So second question, sir, is that you started the international business. I would like to know sir, what percentage of the revenue going forward do you expect to share between international and Indian business? Those are only 2 questions I had.

So firstly, you must realize that our structure is not a 9-month billing structure at all. So people being billed is not the model we follow at all. There is work done and some of the work could be to through common components where our team is essentially working on some common components which could be used across 4, 5 projects. That is a separate thing. So what we go about is an approach called work unit. And unfortunately, customer is the work that is needed for a particular individual startup or individual customer, that is mostly done. In very few cases, to each customer, we actually give a time sheet for each individual person. But that is in a very few projects and mostly the large ones where large amount of capital people are using. That is the model by which it is done. So a particular person may actually end up getting -- particular persons work rather may actually end up billing -- get billed in 3, 4 projects, so to say. Now coming to your question of international operations. We have got some more international projects now, which is just in the starting point. And we expect that some rollouts will happen on this quarter. That said, the plan that we had starting our international operations in London and all, we obviously have put it on hold, keeping in mind the lockdown and the parts in U.K. But we are not deviating from our plan or trying to find an alternative so soon. We believe these are all temporary blips, and we will wait it out and do it at the right time.

Okay. Sir, I have understood the second question very clearly, sir, I got the answer. May I repeat the question regarding the first -- hello?

I'm here.

Yes, sir. Regarding the first question, I would like to know a clarification on -- you mentioned that one employee is being billed into maybe 4 or 5 start-ups based on the number of manhours....

Employee is never billed. An employee is never billed is what I said. I think that's the point you have to focus on. Work is billed. Now who works on that particular unit to deliver it is something that the customers, in most cases, has no clarity on. That's an internal process.

I got it. I got it, sir. All the 100% employees are billed directly to Xelpmoc only. Okay, got it. They are being considered in the employee salary, employee expenses, right, got it, sir.

The next question is from the line of [ Sudip Dugar ], an individual investor.

Yes. My question is regards to the employee expense. So I wanted to understand more on the increase that has happened. Is it due to setting up the U.K. operations or are we hiring more people even in the domestic business? That is my first question. And second question for me that we still don't see the education sector startup is mentioned in your list of investments. So I wanted to understand more on it.

Sure, basically, to answer your both the questions. The first and foremost important thing, the increase in expense in the employee salaries is on account of 3 folds. One is there were certain increments which were given to the employees in the fiscal -- in the last quarter and at the same time, we have also added about 45 additional employees. And third one, there is close to about INR 30.7 lakhs of ESOP expenses. So whatever about INR 40 lakhs increase that you're seeing directly is coming...

I would like to say, this is something that we have been asked several times that how are people being paid, how are we going to have the junior team. Our entire idea is that we want most of our critical employees to be co-owners. So ESOP is the way we want to reward and retain their interest in the company. And that is the reason we were able to walk the talk and actually have people who are dedicated to the cause and the company much more.

And second thing, the investment into the education one, which we have taken approval. It is under process and that should able to -- we would be able to conclude that in this quarter.

Okay. And another question I have, I think I missed your part on your international business, which you could just give some more light on that particular international business as to when do we see things basically rectifying?

Well, as soon as possible is the right answer, we are ready from every angle on our side. But obviously, it's contingent to the global situation in terms of the lockdown and in terms of travel restrictions and stuff like that, right? So as of now, international operations have not started. But that said, even over the online system and all, we have been able to garner some international deals and leads, which are in the process like a normal project. But our international operations, which we talked about, that has not yet started. We are on hold on that because where we had centered it around U.K., that is still not accessible to us from an accessibility standpoint.

The next question is from the line of Rajeev Rastogi from Velvet Lotus Capital.

Sir, what is the long-term vision for the company? What do we ultimately want this company to be?

So I think we have stated this before. We do see that we are more of a value creator. So there are 3 channels of revenue that you can think of. One, of course, is the kind of value that we have due to our holdings in the start-ups. And at this stage, at least, that surely will continue to be our main focus in terms of growth regulator-wise, what is the focus. The second channel is services, which is building up, and you will see that getting into a normal mode probably in another 9 to 12 months, probably 2022 is the right time to look at that as a services part, which is focused on services and self-sufficient. And the third, of course, will be our product and revenues from products or sales of our startups. So in the long term, these are the 3 revenues which will get mixed up. We are not trying to target a particular revenue lot or something of that like a services company, so that's not our model at all.

So is there any internal vison as to which of these verticals you want to focus more on?

The verticals we have already said, right, our main theme is HEAL, health, education, agricultural livelihood. And our skill sets, which are mainly on the data science part of it. We will stay within that part. And well, whatever is the right opportunity at the right moment, we will leverage that but we will not get out of this mass market themes that are there to get to some niche markets and all. But at the moment, that's the strategy. Once we go international operations and all other opportunities may present themselves and accordingly we'll change. But for India, at least it is more and the data sciences part of it is our core focus.

The next question is from the line of [ Rudresh Kalyani ], an individual investor.

I have got a couple of questions. The first question is the other income has almost doubled up. What led to that? And the second question will be on the -- can you give a guidance on the growth for the next 5 years at least?

So, to answer your first question, whatever funds that we have, the excess funds are -- that has been parked in the mutual funds, but mainly because of mark-to-market there you are seeing about over INR 35 lakhs of other income in our financials.

On your second question, I would like to take that. What is the outlook for the company in the next 5 years? I'll start up from around 2022 because that will be 7 years of our completion and 7 years of most of our first startups. We start expecting some tangible results from some of our startups. And in the next 2, 3 years, today, we keep on talking about -- well, we keep on talking of new ones also, but primarily, the settled ones are Fortigo, Mihup, these are the main ones, which are the earliest. And now some of the other ones like Woovly and all are coming into place. So by 2022, we want to make sure that we believe that we have picked up at least 8 to 10 winners in our portfolio, which are big winning potential. And in a 5-year time frame, we believe that at least 4 of them would give us fruition in terms of those value unlocking. In terms of revenue and all 2020 onwards, we should get into a regular peak of a services wing, which almost will work like an independent part of it, and that should have its own growth fashion. And probably from the beginning of 2022 again, the product and the sales-led commissions that we get from our startups, that should start trickling in, but we expect it to reach into a steady state somewhere around 2023. That's more or less the planned outlook. It's a better question to have our 5-year outlook, which is better for us to do because that's more of what we are targeting. We surely are not looking at quarter-on-quarter.

Okay. Can you give a number?

Number of what?

Sorry, basically, we can't.

No, hold on, hold on. I gave you a number of the startups we are looking at. I gave you a number of the kind of potential we are looking at in terms of wins. What other number are you specifically asking?

I was expecting a CAGR number.

Sorry.

I was expecting sort of CAGR number, compounded annual growth rate, something like that.

I don't think we are allowed to give that. I'll ask Srini to see that part.

The next question is from the line of [ Om Prakash ] from MIV Investments.

Sir, the investment call there, you have suggested that -- and compared with the March quarter sir, so why not with September quarter sir?

With respect to what, sir? The investments?

Yes, sir, investment, value of investment, fair values.

So fair value of investments. We have compared it with December to December, sir.

Okay. Okay, fine.

I said December to December, INR 443 million as on [indiscernible] -- INR 292 million as on December 31, 2019.

Next question is from the line of Ankush Agarwal from Stallion Asset Management.

So my first question is, how do you value the investment that you have made every quarterly time frame, if you can help me with that?

So basically, the net value or the NAV of the investments, we look at 2x in India. One is as on 31st March and the other one is as on 30th September. So generally, these are done based on a discounted cash flow method and keeping in view the last round of funding and the other one is how the company is growing. Whether are they in the same growth trajectory what has been forecasted accordingly, we go and we will get the discounted cash flow done by a third party.

Okay. The valuation is done by third party, right?

Yes, yes.

Okay. Okay. Got it. And secondly, my question was similar to what other participants have asked in terms of how do you see the company faring over next 5 years and what kind of business model you are targeting? But on the same, what you have given, so the 3 pilots you have given, the first is product, second is the service and third is the investments. So on the product and service side, if you can help me understand better what kind of revenue stream you are looking at? Like what kind of services and what kind of products -- see the product that we do currently it's great, I mean, which we are developing along with one of -- some of our investee companies and we are offering it. So these are the kind of products that will go out and generate a revenue stream going forward. And if that understanding is correct and that was the first. And secondly, what kind of services revenue generation that you're looking at. Can you help me with that?

Okay. Srini, I'll answer that and you can answer solvency and all. The first part is that we are making our own products from Xelp itself and you can see the list of them in the investor deck as well as the website and few more in the offering. And the second is we have a revenue share model with some of our startups, which are mostly B2C, in some cases B2B also. So both of these, we queue up together to say direct sales kind of a thing that will come to us. On the services part, as we said, that because if we are doing services, we might as well do it for the higher margin. So for the services, we are primarily focused on the overseas market as a field service. The services we rendered to our startups, we hold that part as part of the startup because it's in the service.

Okay. So like what kind of services are that?

See, this is basically -- essentially, with the automation solutions or solutions for independent ERP and some of the services that we offer, we have the additional advantage of being able to champion our startup products. For instance, let's say, our [ Mihup ] segment wants to build a call center voice driven software. The speech to text part we will rather work with Mihup than any other thing, but the analysis part of it, the data science part of it is something we make ourselves too or we may built a product, which works conjointly. Some of the services that we have done in the past, if you can keep a track of it, has been as valid as being able to manage a very high-volume advertisement management system, which is linked to inventory. So based on the position in the inventory how do you make dynamic ads based on products, which are available in inventory and not new products which don't show up in inventory. These are mainly for overseas. So for example, the current one of the projects we are doing is for education NGO in U.S., which is trying to find the effect of the scholarship they're giving to backward classes and their progress in light -- in terms of education. So these are varied and mostly one-off. It's not a standardized tool, we are still finding our suite. Probably in 1 to 1.5, 2 years, we'll have a specialized area. So what we do is anything with data science and anything which is a logical solution and which has the kind of a data science element to it is what we are targeting.

Got it. Got it. Just one comment over here. So in totality, if I -- if my understanding is correct, what we are trying to do is basically be and help for our incubator for startups, either through providing a product or a service or being an investor and like a strategic investor to the start-ups. And that is where the entire business model...

I think we are not a strategic investor, to be very frank. I have explained this, but -- and we like to think of us as a co-founder for the startups. Because we do much more than we need to do. We do the dirty work of developing and building the product and working with the entrepreneurs for the product markets we can go-to-market also.

Okay. Got it. And just one more thing. Do you see yourself raising capital either for exceed your debt just to fund your investment in the start up? Is that a thought that has been there on the company side?

Costs are always there. We will wait for the right opportunity, yes, those things are there. But we will not look at it from funding beyond the style of funding we have done, except for when some of our start-up mature, and we believe that we don't want to dilute ourselves more and we have by reinvesting in the future rounds, we want to hold on to our growth capital for our sales. That's one thing. We may raise capital for developing our own products also. All avenues are open and some discussions have also already internally started.

And that we take it up with the board time to time based on the approach, et cetera, we will be informing you too.

Next question is from the line of Raghav from Ace Capital.

Hi. I had a couple of questions, and I'll just push it one by one. So for our products that we have like DocuX, and xERP, are we seeing any tractions for other clients? That's my first question.

Yes, we are seeing some traction, some POCs and some projects already on both. In fact, some of our paid projects have internally already used some of our products as a base on which we have expanded to give a particular solution.

Okay. And that should provide us some increases in terms of revenue visibility, right, because we don't have to develop a product. It's just a deployment and...

But there are different kinds of products even [ SDK ] is also a product. So which product type is something we find more market fitting based on our skill sets, that we'll find out.

Okay. Okay. And my second question will be, we have started a business with a leading school, right? That has got like more than 40 school establishments in India. So that thing, is it a temporary phenomenon because I understand schools are opting for e-learning or distance education, primarily because of COVID. For once in a year's time, COVID situation moves on, how do we see that business opportunities of it?

I don't think the change we have seen is irreversible. Personally, I believe that this has been a great wake-up call to most of India, to know that what problems they have faced because of COVID, is something more schools in interior India or Bharat, as we call it, are facing on a day-to-day basis. So I think this has been a solution that probably will last out much more. And again, the solution we are building is not at all for e-learning only. It's not a direct to consumer. It's basically to make sure that schools are able to manage individualized learning with the class based approach much more easily. And in fact, the model that we have, some of the partners we are already piloting and all are also for classroom presence using interactive boards and all. So I don't think the solution is limited to e-learning like your thinking. We have made a generalized solution for -- see, what our philosophy has been that till now, most education system has been digitizing in education. So whatever was available offline, they are making online versions of them, but this process is not changing. We see, on the other hand, they are trying to digitalize education and saying that imagine that this is a new medium. If I have these facilities and this technology tools in my hand, how can I change education by itself? So whether they're in class or at home, education content is not there. It's not fair to think that a teacher teaching in a class has no need for audiovisual elements to supplement our teaching skills. It is also important for a structured way of teaching so that you standardize and not let it be reliant on it overtly. That certain courses, certain assignments, certain assessments are done in a standardized way, irrespective of the teacher who's monitoring. And that gives a little bit of a standardization to education itself. That has been the main focus of what we are trying to be. So we do -- so in short, we do believe that this is not a COVID-based reaction product only, it is there for the long term.

Okay. And the last question is, if my memory serves me right...

Raghav, may we request you to please return to the queue for your follow-up please as we have more questionnaires in the queue waiting?

Okay, sure, no problem.

Thank you. [Operator Instructions] Our next question is from the line of [ Prithvi Ram ] from VPM.

Among the services that you are offering, is like voice-to-text conversion. Now my doubt is, are you guys working on multiple voices at a time, as we speak right now, multiple users involved in this call, right? Can we process all these users data individually and give them separately?

Okay. Just to clarify, that is the charter of one of our portfolio companies called Mihup, not that only, it does additional things on top of that analysis. And to come back to your question in a direct pattern, yes, the product Mihup can separate out different voice streams and do individualize one. So the product that you heard of that has been rolled out by Mihup into several parts, like call center and all, they are stripping of the voice with voice correction, all those things are important. For example, someone's phone rang when you were talking. You have to take that voice off and then focus only on the spoken words of the individual. And then also keep it tied to particular individual. So up to 3, 4 people, we have tested because that has been the call center scenario, which is what we are focusing on. For conferences and all, we are not part of a solution yet.

My second question is, like, will that work for multiple -- multilingual like our country has like some 21 like that.

That is the differentiation of Mihup. So as we told you that when you are -- what is being done is now every Tata car that is being produced and manufactured goes with Mihup onboard. And the whole card passenger-driver interaction is through local languages. As of now, we are supporting 4 languages or any mix of them. Because in India, we are not puritans. We don't speak pure Hindi, we don't speak pure Bengali or pure English. And even the English is very Indianized with sprinkling of Hindi, English words, everything is mixed together. So we went through a vocabularize way. And the second aspect, which is very important for Mihup, it means, it works in offline situation also. So you don't have to be connected to have your voice interpreted. I suggest you take a look at the Mihup site to get further clarification because it is really a good technology, which I'm very proud of that we could make that out of India. And it was also one of the top 50 AI innovations in the world according to Bloomberg, 2, 3 years back when we started just for your info.

Next question is from the line of [ Omkar ], an individual investor.

Yes, firstly, let me congratulate for a good set of numbers. I mean, it's really great to look at getting a profitable quarter. So my broad questions are broadly on the investments in the startups. I just want to understand at a high level, what sort of thought process goes behind the mind when you make any investment in this startup? And next question is about how do you see your product being differentiated from other competitors in the sense when you go out, out there and then try to get more clients or customers? So what is that aspect which helps you guys to scale up your business? Is it like more of a pricing aspect or the kind of quality of the product you give to your customers?