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Ladies and gentlemen, good day. And welcome to Birlasoft Limited Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Vikas Jadhav, Head of Investor Relations at Birlasoft. Thank you, and over to you, sir.
Many thanks, Vikram. So good afternoon to all, and welcome to Birlasoft's Q3 FY '20 earnings call discussions. I'm Vikas from Investor Relations. And joining us today here, we have our faithful team consisting of CEO and MD, DK; our CFO, Rajeev Gupta; Head of HR, Samit Deb; Chief Delivery Officer, SK; and Roop Singh, our Chief Business Officer. So please note that anything which we refer to our outlook on the future is a forward-looking statement and must be read in conjunction with the disclaimer, which we are putting on our investor updates and to the exchanges, which mentions, of course, the risks, which the company faces. So now with this, I hand over the call to SK. Over to SK -- DK, sorry.
Yes, yes, yes. Thank you. Thank you, Vikas. Good afternoon, everyone. This is DK. Welcome to Birlasoft's Q3 financial year '20 earning call. We completed the first year of merger on 16th of January '20 and it has been a phenomenal journey, I must say. We underwent the twists and turns in business as was expected with any sizable merger. I take this opportunity to thank all our stakeholders, be it shareholders, employees, customers or partners for firmly standing behind us in this journey. Let's look at our performance for quarter 3. Our revenue for quarter 3 financial year '20 is at $116.8 million versus what we did in Q2, which was at $109.9 million, which is a growth of 6.3% quarter-on-quarter. We had this growth coming from multiple customers, including in Invacare. With good growth, the margin also saw a good uptick. EBITDA margin improved from 11.1% to 12.9% in this quarter. If one looks from a year-on-year perspective on the pro forma financials which we had reported last year, the margin has improved by around 408 bps year-on-year. The deal momentum is also healthy. We won $361 million of deals, of which $278 million were new wins. For the current year till date, we have won $544 million worth of deals, of which $416 million are new deals. While deal pipeline continues to be healthy, we continue to expand our partner channels and sales bandwidth while expanding our footprint in enterprise and digital solutions. This is also the quarter which saw stability and growth for the first time after merger in our SAP business. It was heartening to see growth across all horizontals with SAP and IES, but both ERP solutions registering over 6% quarter-on-quarter growth. So last time, I did talk about SAP and how we were structuring it, and we were setting up the leadership team in the city, and that has been completed. And we are already seeing the growth in the SAP business as well, which is a good news for Birlasoft. I had mentioned earlier about our focus on top accounts. The top customers led our growth in Q3. Our top 5 and 10 grew 10% sequentially, while top 20 saw growth 8% quarter-on-quarter. Through our constant effort in expanding our relationship with our key customers, we experienced good progress in cross-selling in U.S. and European customers. We have added 135 people during the quarter, taking our total headcount to 10,129 level. Our LTM accretion has come down from 22.5% in quarter 2 to 20.3% in quarter 3, which is YTD. Whereas, our quarter 3 alone on a standalone basis is around 15% attrition. So that means we've significantly improved our attrition from what it was in Q2. And also, YTD has improved from where we earlier saw that in quarter 2. However, if I look at our Q3 standalone basis, which I said 15%, I believe that we would continue to improve on our attrition so that our overall YTD comes to a healthy level. While we were laying the foundation for growth in the last 1 year, our focus on improving the health of our balance sheet was an ongoing effort. With the good growth in Q3, those metrics have further improved and Rajeev will take you through that in some time. On the integration front, we are done with all except IT integration of 2 core systems, which will get over in this quarter, and we are progressing on this as was scheduled. Going ahead, our priorities remain, number one, growth. We'll continue to center our talent in service lines, sales and delivery. We've made significant improvements in our structure. I did talk about that in the last quarter also. And we will continue to assign our talent to our focus area during this quarter, and we'll continue to work towards the same. The second would be improving the [ NSA ] Revenue. I have been talking about this in the last 2, 3 quarters that how we want to change the quality of revenue so that our growth and profitability become more and more sustainable. With some of our key wins in Q2 and Q3, we have seen good growth in the annuity business, and our ratio of annuity business versus project has started improving. We are working to further grow this proportion of our [ NSA ] revenue with some of the deals that we have in our pipeline by using our significant strength in the ERP and digital business. Cross-selling, we have always been showcasing as one of our key element in this strategy. This will continue to remain a priority. While expanding our relationship with key customers, we are keeping our focus on reviewing and optimizing bottom tail accounts as well. The ISVs and OEMs will also be our focus area because we enjoy a very good partnership with SAP, Oracle, salesforce.com, ServiceNow, Microsoft and Amazon. We will further expand our focus on our partner network in Europe and APAC. So far, we had much stronger relationships in the U.S. and now we are expanding the same relationship to Europe and APAC as well so that we start experiencing the same growth in the other geos as well. But we always want to be known as a very dependable partner to our customer. We have sharpened our focus on talent development through leadership programs, and digital learning initiatives. And in that way, you must have noticed in our investor update that there are multiple awards that we won in the ERP space and in the digital space. There are multiple awards that we won during this quarter as well. And that only showcases the strength that we continue to build in our service lines. Having said that, last but most important is our focus on operational rigor. That has helped us show quarter-on-quarter growth in our EBITDA, despite some of the headwinds during the integration process. We continue to optimize our cost structure to be more efficient and to run ourselves as an efficiently run organization. With this, I will hand it over to our CFO, Rajeev Gupta, for providing more color to our financials. Over to you, Rajeev.
Thanks, DK. Good afternoon to all of you. Let me take you through the financials in some more detail. Our Q3 revenue was, at hand, $116.8 million, a quarter-on-quarter growth of 6.3%. This growth primarily came from Invacare, although we also saw growth from accounts other than Invacare. In constant currency terms, we had a favorable cross-currency movement of 20 basis points hence, constant currency growth was at 6.1% compared to previous quarter. Q3 EBITDA was at $15.1 million versus $12.1 million in Q2, a quarter-on-quarter growth of 24% and year-on-year growth of 47.8%. EBITDA improvement of $2.9 million compared to previous quarter is mainly from 2 areas. The first is growth in revenue and improvement in margins. The second is cost optimization of delivery and travel-related costs. Q3 PAT was at $10.2 million versus $5.8 million in Q2, a quarter-on-quarter growth of 75% -- 75.7% and year-on-year growth of 77.1%. Our other income was higher by $2 million, mainly from ForEx gains and gains from redemptions of mutual funds. I'm pleased to share that our continued efforts towards improving the quality and health of our balance sheet has yielded further results. Cash and cash equivalents have improved from $77.9 million end of Q2 to $96.2 million end of Q3. Our Q3 [ solid ] cash collections were at 116% of Q3 revenue. At the start of this fiscal year, we had set a target to achieve cash and cash equivalents of $100 million. As you can note, we are already there by end of Q3, and our endeavor will be to stay above $100 million by end of Q4. Our sustained efforts on reducing outstanding receivables has resulted in lowering DSOs from 81 days end of Q2 to a benchmark of 65 days end of Q3. Unbilled revenue have further come down from $12.4 million end of Q2 to $9.4 million end of Q3. Our U.S. dollars hedge book has increased from $78 million in Q2 to $82.8 million in Q3. The average hedge rate has improved from INR 72.2 in Q2 to INR 72.9 end of Q3. On the tax front, we have successfully closed quite a few years' past year's assessment, which will result in realizing income tax assets on the balance sheet. We incurred CapEx of about $3.7 million this quarter, mainly towards Bangalore facility. Our CapEx for the first 9 months is around $6.7 million. We anticipate CapEx for the year to be around $10 million, much lower than $20 million estimated at the start of this year. Our health of the financials are in a much better shape than a year ago, and our efforts will continue to improve it further. We sincerely appreciate the support of our shareholders and investors during this challenging year of integration. It gives me pleasure to share that we have declared our maiden interim dividend of INR 1 per share this quarter. With this, I would like to now throw open the floor for questions.
[Operator Instructions] We have a first question from the line of Nisarg Vakharia from Lucky Investment Managers.
Sir, it was very heartening to hear when I heard DK, sir, said that the growth in this quarter is actually not only contingent on the Invacare deal. Can you elaborate slightly more on that as to how much growth we could have got by the execution of Invacare deal? And how much from the other business?
So thank you, Nisarg. I would say that I can't give you the specific numbers because we do not have that agreement with customer to share how much billing we do for Invacare. But even without Invacare, we have grown handsomely from the previous quarter. So there is a good balance between the growth that we got from Invacare and from the other accounts in this particular quarter.
Okay. And sir, our EBITDA margins have gone to almost 13% in this quarter, should we assume these as the new sustainable sort of margins going ahead?
So I would definitely be very positive for the next quarter also that we will be close. But it is yet to be kind of a theme from the perspective that we continue to stabilize the Invacare because it is still going through the transition period. And that element of surprise might be there, but it is not going to be any significant. So for the purpose of looking at sustainability, we can definitely assume that we'll be very much close to the margin for EBITDA that we have already delivered.
That's great, sir. And lastly, sir, now since our cash balance has become a healthy INR 700-odd crores, any discussions within the Board on rewarding the shareholders by doing a buyback or giving dividends?
So absolutely, as the -- I have always maintained that we are definitely having all the options open. And in fact, we are discussing very actively on how do we conclude on that. So very soon, I think we should be able to conclude that and come back. But yes, both options are all open, and we are really working very actively on that. And dividend, of course, we have given interim dividend, you must have seen that.
[Operator Instructions] We have a next question from the line of Shradha Agrawal from AMSEC.
Yes. Congratulations to the management team on a solid quarter across all operating metrics. Sir, first thing is, I mean, you've shared the TCV of new deal signings. Can we have that number for deal renewals as well?
Can we have that for?
Renewables in the quarter?
So if you look at the figure that I shared, the $278 million. So if you look at -- one data point I shared about the new wins that we are talking about $278 million in this quarter. But if you look at the renewal, it is $84 million that we had in this quarter.
Right. Sir, and in this $278 million, did we have any large deal signings? I mean, a large deal for that upwards of $10 million? Does that...
Yes.
Okay. And would you care to follow up...
Invacare deals that are out of it.
Apart from Invacare I mean to say -- ask.
Yes. So the Invacare is there, and then we did have another life sciences contract where we signed the deal, more than $20 million.
Right. And any color on the pipeline, if you would want to share, how does the deal pipeline look like?
So I think pipeline is very healthy for us. But I believe that with this whole integration now behind us, and the group's focus on the cross-selling with our tail accounts, we are seeing very good progress with our pipeline generation outlook. So today, we have a healthy pipeline, and we will -- we continue to add every month now the cross-selling opportunities, and it is generating us -- it is giving us the confidence that it will definitely be a good set of the quarters coming forward and giving us a growth. But we have a good, healthy pipeline now.
Sure, that's helpful. And Rajeev, how should we look at our tax rate now for the future quarters?
So -- I mean, we have shared it in the previous quarters also, our tax rate hovers around 30%. This quarter, in particularly, we saw the tax rate come down to about 28%, and that is because the mix of revenue has been most in U.S. and Europe, which are low tax geographies, but you should take the tax rate to be at 30% from here on.
Right. And sir, just one last question. You did mention that your component of annuity revenue is ramping up, but would it be possible to share the split between annuity and project-led revenue for us?
Yes. So earlier, as we said that our revenue was in the range of about 53% as the annuity business. It has already improved to about 58%.
We have next question from the line of Rohit Balakrishnan from VRDDHI Capital.
Sir, just 2, 3 questions. So one was -- so you said about $278 million were new deal wins. So does this also include the renewals? Or these are -- these doesn't -- these don't include renewables?
So these, the $278 million do not include renewals.
And the -- so Invacare is how big of this component of this deal win? Around $242 million?
$242 million. $242 million.
Okay. Got it. So sir, if you -- in terms of the pipeline, so -- I mean, in terms of the -- so if you take the dollar revenue in this quarter, which is about $117 million, so I mean, from -- so 2 questions on this. So one is, obviously, there'll be whatever runoffs that we had after the merger, those are all behind us. Would that be absolutely a fair assumption?
Yes. Some of the significant ones are definitely behind us. But as I said, our annuity revenue is about 58%. And then we have very long-term projects. And some of the projects in digital, as you know, that could also be short term. So it is not as if that the entire runoff will ever be for any other company or for us, will be behind us. But yes, the percentage will not be as much as we saw in the last 3 quarters.
Sure, sure. And actually, sir, the bigger question was that there what would the runoffs be in -- I mean, net -- the net ads, which was not happening for us because you were under integration and the sales pipeline was still maybe not kicking in. So that would be from this quarter? I mean can you take this as like a base for future quarters, this $117 million, which was -- what was the case when we were like, we acquired them in the -- at the first quarter of acquisition?
Absolutely. I would say, yes, that we should take this as a new base because last quarter also, we -- or last 2 quarters, actually, we said that we have hit the bottom, but there were a couple of surprises that came up. But I think, as you also rightly mentioned that it is behind us, so we should take this as a new base.
Got it. And sir, in terms of pipelines, so your commentary is quite encouraging. I mean so -- I mean, can you sort of look at growing faster than the industry maybe in the coming year, in FY '21? Will that be something that is possible for us?
Definitely, it's possible, okay? And we are working towards that. And I'm sure that with all the wishes from your side, we will continue to do better than the industry.
Sure, sir. So our wishes are always with you, sir. And sir, just one more question on tax. So we are going to be on the old tax item only. So we have a substantial amount of deferred tax assets. So any sense on when do we move to the newer regime? Or that's still not something that you've worked on?
So we did share this in the previous earnings call. We did evaluate between 30% tax and 25% tax rate. Currently, we've got that as well as deferred tax assets. In our view, and we've simulated, it'll take us about 18 to 24 months to exhaust MAT as well as deferred tax assets. So it's most prudent to continue at 30% tax rate and then opt for a 25% tax rate. As you know, once you opt for a 25% tax rate, there's no going back. So we don't want to take a dual [ VAN ] run and then see the impact of MAT as well as deferred tax assets.
We have next question from the line of V.P. Rajesh from Banyan Capital.
[indiscernible]
Sir, I'm sorry to interrupt, we're unable to hear you. Please repeat the question.
In fact, in terms of number of clients, your $10 million-plus clients went up by 1 and the $5 million-plus clients went down by 1. So is it just the Invacare impact? Or is there another client, which has come in with more than $10 million-plus of revenues?
There are a couple of accounts, which have grown from $5 million to $10 million. I gave an example of what we run in, in the norm and [ what ] is another one. So definitely, there are kind of the accounts that have grown from the lower category to the higher category that means from $5 million to $10 million to $20 million.
Okay. And in terms of the [indiscernible] we are experiencing, could you just describe what is driving that? Is it the HANA impact [indiscernible] efforts on our behalf, which is leading to these significant deal wins?
I'm sorry, I didn't really hear your question because your voice was dropping. If you can please repeat that, that would be great.
Sure, DK. What I was asking was that the fact that we are winning a lot with [indiscernible] is it -- what is driving that significant improvement in the backlog?
So again, your voice dropped, but let me answer whatever I heard, okay? There are a couple of significant changes that we see that we are seeing from a structure perspective, that is giving us the momentum -- I talked about SAP. We have started to see very good growth in the SAP, again. We wanted to bring some changes into our leadership and pick up the momentum again, which is what has been demonstrated in this quarter. At the same time, I have always talked about the cross-selling on both sides with the accounts, which are the larger and strategic accounts for us. But also converting the tail accounts into the larger accounts, so that we can go and cross-sell these services for simple reasons that we already have a relationship there. So those are the 2, 3 things that have worked very well for us in order to give up the momentum that we are seeing.
[Operator Instructions]We have next question from the line of from Abhishek from Elara Capital.
Hi. Can you hear me?
Yes, we can. Go ahead.
Sir, the first question is regarding earlier, your comments that use -- for the quarter, there was growth not just from Invacare contribution, but other brands as well. So could you just elaborate as to what you did differently in this quarter for the clients outside Invacare versus what we were doing 1 or 2 quarters ago? I understand that there have been a leakage or runoff, but apart from the runoffs, are we doing anything differently in coaching our clients?
No. Correct. I think to my answer is same what I gave in the previous question, but let me just give a little bit more color to that. See, we started focusing on our clients, one which where we have sold a single service, but now we are presenting ourselves here with a more set of services that are felt after the merger. So when we are going with that, with the relationship that we have with them, we are picking up the new opportunities, so -- which is what I talked about cross-selling. The second piece that I said that there is a momentum in the market, we have set our team right, and now we are very much focused on how do we really expand ourselves into the SAP service line and those opportunities. Third is that we have started presenting ourselves very, very strong in the manufacturing domain. As you might have seen last time that we restructured ourselves by consolidating 3 verticals into 1 because they all are around the manufacturing processes. So we have far stronger case studies today that we can go in front of the customer. So that means that we are now being seen as a strong manufacturing player. And that also is helping us get in front of the customer with much stronger footprint in those processes and that also is helping us close other deals with them. So these are the 3, 4 stronger points that I would definitely credit that has helped us in really gaining the growth that we have gained in this quarter. I believe that we will continue to follow our strategy of really first going to our customer -- existing customers so that we can sell more number of services to them. And then also really looking at going after the new customer because there is a significant shift that is there in the ERP space, where there are clients who are shifting, even from the older version to the new version, or they're moving to the cloud or they are making their existing enterprise solutions more intelligent by using and integrating with digital technologies. So those are the ones which is helping us open new doors. So mostly with that strategy, our [ NM ] growth will see the momentum also. So these are the 3, 4 strategies that we'll continue to play with that. I think the good part with that whole thing is that we have a very strong partner network, and that acts as a very formidable channel for us, and I'm sure that we'll take all the benefits that we can from our stronger relationship with Oracle, SAP, ServiceNow, salesforce.com, Amazon and others.
That's really helpful. And so -- and you -- just to follow-up on that, sir, you also had a comment about focusing to improve the partner network in Europe. Are we kind of also trying to secure large deals through the channel -- the industry association channel that most of the mid-caps use? Are we thinking on those lines?
Yes. Yes, absolutely. Because the very reason that why we want to expand our partner network in Europe and APAC is that we can go after larger deals and significant deals, because a lot of time, the partners are engaged and involved in order to go in front of the clients. So that for the larger transformation program, we are seen as partnering with those ISVs and OEMs. So we saw that success in the U.S. and now we want to replicate that in Europe and APAC as well.
Okay. And sir, the third question is regarding the SAP or the ERP practice, in general. So historically, the SAP is -- was volatile from a quarterly perspective because it was predominantly implementation kind of a business. So how are we trying to change the mix of our business so that we don't get into that quarterly volatility, especially on the ERP or the SAP moment business?
Yes. So there is a longer answer and technical answer that I have, which is part of our strategy. But just to give a summary, I talked about how we are trying to change the ratio of our annuity revenue against the project revenue. I think that is one strategy because the moment you try to look at securing annuity revenue, you do not look at SAP as SAP alone, you try to look at what are the surrounding services and can do be bundled together so that you continue to be seen as a partner that can go beyond implementation and will provide services for a longer period of time. So that's the approach in a nutshell that we are doing. But of course, there can be a long technical and more deeper answer to that, which is actually part of our strategy.
Okay, that's helpful. And just last 2 from my side. One is on the momentum of the business. So heartening to know that you don't include -- I mean, the deals do not include the renewal. So with the momentum of net new business that we are seeing and the roll-offs kind of stabilizing do you believe that a 3% to 4% or 3% CQGR is a sustainable number from the last 1 year, you have stabilized the business? So from here on, over the next 12, 18 months? Is that 2.5%, 3% CQGR run rate possible?
No. I would shy away from giving any guidance. But as I earlier said that with all your wishes, I'm very confident that we'll continue to click that number.
Okay. And the last one on the margin. So did we kind of achieve -- overachieve our numbers on the margins in the Q3? Or we were expecting the margins? I understand that the revenue contribution would have been a big driver. But outside of the tailwinds of Invacare contract, did we overachieve margins? Or we still have a good room to improve margins?
No. No. We do have a room to improve margin. There are no doubt about that. But I think we need to first make ourselves sustainable at this level. And the moment we get that, then there is ample room for us to improve our margin going forward.
[Operator Instructions] We have a next question from the line of Apurva Prasad from HDFC Securities.
DK, can you talk about some of the success that you're seeing in your top 10, especially in the cross-sell side and the annuity area that you spoke about earlier? But maybe specifically in the top 10, anything that you can probably provide more color on?
Correct. So I may not give you names, pardon me for that. But I would give you some of the key examples. We were, as I talked last time also, that there is one client, which is one of very large accounts for us. And we have always been an annuity player for a very long time. But what we started working there was that by cross-selling, we went in front of them with our data and digital services, and we saw significant opportunity getting signed up for the next 2 to 3 years with them. So that is one very, very good example that we have. Similarly, if you look at one of the clients, which we actually opened last year, just about 2 years back, today, we are getting into more than $20 million run rate every year with them. And these are the opportunities, which are all cross-sold and are the mix of annuity as well as the new deals that we continue to win with them. There is another life sciences account where we are the preferred data partner. And there are -- there is significant growth there we have. At the same time, there are -- there is an ample room for us to continue to grow with them because the data is one thing that is becoming -- the data analytics is one thing that is becoming very significant for the life sciences and pharma companies, and we are seeing sufficient pipeline as well as growth momentum with them. So these are the 3 examples that I talked about. There are certain cases where we have started making a choice that should we go for onetime projects? Or should we be preferred as a partner, which is a long-term annuity partner? And we have really started creating the right balance there that in some of the cases, we have started [ preferring ] or being the long-term partner so that we can change the quality and the ratio of revenue that we have. And that is also another one, which has given us the benefit because the moment we do that, there is a longer period that we'll have to continue to cross-sell our other services and hence, converting those accounts into the large accounts. So I think those are 4, 5 examples that I took with you just know without really mentioning the name, but I think life sciences, energy and utilities, and I think discrete manufacturing are the 3 area which clearly are very good examples where we could showcase that how we are changing the size of relationship that we have with our customers.
That's very helpful, DK. And on -- in terms of investments required further, do you think any more investments to increase the leadership bandwidth incrementally from here would be required?
So it is not going -- from the investment perspective, I think we have -- we are in control. I don't think that I need to really increase my cost to do that. But I think we are very much in control, and we have most of the leadership in place. So it is not -- from the investment perspective, it's not going to be any significantly different than what we have done in this quarter. In the year, I cannot say that because it has gone up and down. But from quarter perspective, I think that number definitely -- or that cost will be quite sustainable.
[Operator Instructions] As there are no further questions from the participants, I'd now like to hand the conference over to the management for closing comments. Sir, over to you.
Thank you very much, everyone, for joining the call. As we are going through this change in our organization, I'm very happy to see that we have seen very good stability, both from the operations perspective and the momentum and growth perspective in this quarter. Our objective would continue to remain that we grow quarter-on-quarter. And also, we continue to improve on our profitability because that is the only way by which we can have sustainable business. There are significant steps that we are taking in order to continue to create momentum in the growth as well as continuous improvement in the profit, and I'm sure that we'll continue to deliver the results that you all will be very proud of. Thank you very much.
Thank you very much, sir. Ladies and gentlemen, on behalf of Birlasoft, that concludes this conference call. Thank you for joining with us. And you may now disconnect your lines.