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Datamatics Global Services Ltd
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Ladies and gentlemen, good day, and welcome to Datamatics Global Services Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Ms. Asha Gupta from Ernst & Young. Thank you, and over to you, Ms. Gupta.
Thank you, Nirav. Good afternoon to all participants in the call today. Welcome to the Q1 FY '23 earnings call of Datamatics Global Services Limited. The results and presentations have been already mailed to you, and it is also available on the website, www.datamatics.com. In case anyone has not received a copy of press release and presentation, please do write to us, and we will be happy to send you off.
To take you through the results and to answer your questions, we have with us the top management of the company represented by Rahul Kanodia, Vice Chairman and CEO; Sandeep Mantri, EVP and Chief Financial Officer; Mitul Mehta, EVP and Chief Marketing Officer. Now we'll start the call with brief overview of the quarter on the business, which will be then followed by financials given by Sandeep. We will then open the floor for Q&A session.
As usual, I'd like to remind you that anything that is said on this call which gives any outlook for the future or which can be construed as forward-looking statements must be viewed in conjunction with the risks and uncertainties that we face. These risks and uncertainties are included but not limited to what we have mentioned in the prospectus filed with SEBI and subsequent Annual Report, which you can find it on our website.
With that said, I will now hand over the call to Rahul. Over to you, Rahul.
Thank you, Asha, and welcome, and thank you, everyone, for joining our Q1 FY '23 earnings call. Before I start sharing the business update, I'd like to inform you all that from this quarter, we have reclassified our business into 3 segments: Digital Technologies, Digital Operations and Digital Experiences.
Till the financial year '22, we used to classify them into 2 segments, which is IT Services and Business Process Management. The relook as a classification is primarily driven by 3 factors. First, most customers are increasing their deployment of digital technologies, and Datamatics has been playing an active role in supporting them in this journey. As legacy technologies are passe, the future market and growth lies in rapid adoption of and migration to digital technologies, which includes cloud, DevOps, low-code/no-code and SaaS platforms, digital workplace, analytics and artificial intelligence.
Second, almost all of our back-office operations are delivered on the back of digital platforms. And going forward, this will be the mainstay in delivering operations outsourcing. Our digitally augmented suite of technologies, all of our operations deliver process excellence. The suite comprises our smart workflows, mobility, robotic process automation with TruBot, intelligent document processing with TruCap+, AI/ML models in TruAI, and business intelligence, which is TruBS.
Third, the customer experience has become central to success of all companies. Today, all these companies have a multichannel engagement model with their customers. With technology penetration permitting our lives, it becomes paramount for companies to deliver a seamless digital experience to an increasingly younger customer base. Our expertise in customer management processes and technologies ensure superior and consistent customer experience across the entire customer life cycle. With all these factors coming together and with Datamatics well entrenched in delivering digital solutions to our customers, it becomes imperative for Datamatics to reposition itself to capture market opportunities and more accurately represent our value proposition, which enables enterprises to go deep in digital to boost their productivity, customer experience and competitive advantage.
Coming to the business updates, I am happy with the overall performance of the business. We started the year on a strong note delivering a revenue growth of 13.6% on a year-on-year basis. The growth was broad-based across all 3 segments. On a Y-on-Y basis, our new deal closure has increased by 27% in Q1 of this year as compared to Q1 of last financial year. In this quarter, we signed a total contract value for about $19.3 million. And for a sequential quarter comparison, we had signed a total contract value of $14.5 million in quarter 4.
Our EBIT margins on the year-on-year basis have shown a marginal improvement from 11.6% to 12% in the quarter. However, on a sequential basis, it has dropped slightly by 148 basis points from 13.5% to 12%, primarily due to annual salary increments and investments in our products. Although across the industry we have seen a drop in margins in this quarter, we are confident that our margins should be stable during this fiscal year.
Our margins in digital technologies are negative. This is primarily for 5 reasons. First, we have invested heavily in our Tru suite of products and fare collection platform. Our expenses have increased by INR4.3 crores in this quarter compared to Q1 of last year. These investments are now starting to yield results. And in Q1, we acquired 10 new customers. Additionally, last year, we signed 2 large AFC deals with Kolkata and NCRTC valued at INR350 crores. These products have kicked off, and this year, we will see revenue accrual from both of them, which will make us the leading player in AFC market.
Second, there is a shrinkage in one of our large and highly profitable customers due to a multi-vendor strategy adopted by them recently. Third, 77% of our revenues in digital technologies is generated from India and the Middle East. These regions are very price-sensitive and low-margin territories. We have started taking corrective action on this front by renegotiating our prices and focusing more on the U.S. and European markets. I'm happy to state that our efforts in the U.S. are showing good results, and our pipeline has increased by 32% over Q1 of last year.
Fourth, some of our services are low-margin offerings, and we also have some low profitability customers. Here we are systematically changing our service portfolio to focus on more high-margin solution areas and de-reading low-margin customers. Fifth, the current market is facing strong headwinds on the supply side, resulting in unusual increase in salaries and talent acquisition costs. To counter this, we have stepped up our investments in hiring, training and upskilling all our employees.
Our margins in Digital Operations and Digital Experience are healthy at 23.3% and 23.2% respectively. We expect these operations to continue giving healthy margins in the same range. Although the macroeconomic environment with the war in Ukraine and the economic wars with Russia and China, coupled with the inflation in the U.S. and Europe pose a concern in terms of a looming recession, and therefore a shrinkage in demand, we have not experienced a slowdown yet. Although we remain cautious about the possible downturn, to-date, we are seeing a very healthy demand environment for our services.
In conclusion, going forward, we are optimistic about the overall demand environment and are confident of maintaining the growth of around 15% in the coming year.
With that, I will now hand over the call to our CFO, Mr. Sandeep Mantri. Sandeep, over to you.
Thank you, Rahul. Welcome, everyone, and thank you for joining us in quarter 1 FY '23 earnings call. As explained by Rahul, effective this quarter, we are changing our segment with our deep and digital approach. And therefore, we have changed our segment reporting from traditional IT and BPM to Digital Technologies, Digital Experience and Digital Operations. And also, effective this quarter, we are reporting EBIT, and not EBITDA, for segments. With this now, let me take you through the financial performance for the quarter ended June 30, 2022.
Our Q1 FY '22/'23 revenue stood at INR326.9 crores, which is 4.3% up on a sequential basis and 13.6% on Y-o-Y basis. Our consolidated EBIT grew by 17.9% on a Y-o-Y basis. The EBIT margin for this quarter is 12% compared to 11% in last year's same quarter. However, on a sequential basis, our margin has dropped slightly from 13.5% to 12% due to higher increments and higher spend on product development and marketing. We saw the margin drop across industries in the range of 1% to 2.5% in this quarter. We aspire to maintain a healthy double-digit margin in the coming quarters.
Our other income for the quarter was INR13.2 crores compared to INR12.2 crores in the last quarter, which is an increase of about INR1 crore on a quarterly basis. This other income comprised of a onetime income, investment income and exchange fluctuations. Our PBT before exceptional items was at INR51.6 crores compared to INR53 crores in the last quarter and INR36.7 crores in the last year same quarter, which is 2.7% less on a quarter-on-quarter basis, but 40.5% more on a Y-o-Y basis.
Our tax rate for the quarter is 17.3% compared to 19.1% in FY '21/'22. We expect to maintain the tax rate north of 20% in this year. Our EPS for the quarter was at INR7.36 per share, which is higher than last year same period, which stood at INR6.72 per share in the last year quarter.
On segment, our segment-wise results are as follows. Our digital revenue was at INR147.5 crores, a growth of 3.6% sequentially and 18% on a Y-o-Y basis. Digital Operations EBIT margin was healthy at 23.3%, which is 300 basis points up on a Y-o-Y basis and its contribution to total revenue was 45%. Our Digital Experience revenue was at INR46.2 crores, a growth of 15.7% sequentially and 18.9% on a Y-o-Y basis. Digital Experience EBIT margin was at 23.2% and its contribution to total revenue was 14%.
Our Digital Technology revenue was at INR133 crores, which is a growth of 1.6% sequentially and 7.5% on a Y-o-Y basis. Our Digital Technology EBIT margin for the quarter remained a negative 4.3%, primarily due to higher spend on product platform development and sales and marketing as well as shrinkage in one of our large customer -- large profitable customer due to a multi-vendor strategy adopted by them. Our Digital Technology contribution to total revenue was 41%.
Coming to balance sheet. We continue to remain healthy. As of June 30, 2022, our liquid and cash net of debt stood at INR388.6 crores. Our DSO was at 69 days as of June 22 as compared to 74 days in March. In terms of geographical footprint, U.S. is the largest geography with 55% of our business coming from U.S, India is 25%, and the rest of the world, including U.K. and Europe, is 20%.
In terms of industry footprint, BFSI continue to remain the largest segment for us, which is 25% of our revenue, followed by education and publishing, which is 23%. And then technology and consulting at 22%, manufacturing, infra and logistics at 13%, 7% is nonprofit and nongovernment organization, and [indiscernible] revenue.
Our client contribution remains very healthy with top 5, 10, 20 clients contributing to 25%, 37% and 50% respectively. And this time, we added -- this quarter, we added 19 new clients in the quarter. This was the update on the financials for the quarter. Thank you for your patience and continued interest in Datamatics.
With this, I will now pass on the call to operator to open the floor for question-and-answer session. Thank you.
[Operator Instructions] The first question is from the line of NGN from ENAM Securities.
In the context of where the world is moving on digital, some of your own digital assets that you have built over a period of time, and you have nice set of digit assets, the automation assets and digital modernization assets. And the 3 businesses that you have, they all have great potential going forward. So let's start from each of these businesses, starting from Digital Operations.
So this is a business where you have high levels of productivity, high levels of margins, and what's the outlook for this? So this business can grow greater than what it is today? How much can it get better? What I mean is, how do you focus on large deals today? [ So you ] doing larger deals than what you have been winning? How do you focus on many million-dollar accounts, 1 million to 5 million to 10 million to 20 million accounts. And so that's where -- that can happen only when you win large deals. Large deals can construct a number of million-dollar account of high potential. So if you can take us through that, that will be useful.
I also see some very interesting commentary on the operating side and the deal win qualities. You have talked about 5, 6 deal wins. So if you can comment about potential at each deal wins, that will be useful.
So on Digital Operations and Digital Experiences, Digital Operations is more -- the way we differentiate between the 2 is Digital Experience is more front office, where there's customer engagement, multichannel engagement with end customers. Digital Operations tend to be more back office, which is internal operations to the bank, insurance companies, those types of companies, publishing houses, retail [ houses ]. So the opportunities are vibrant because a lot of these guys are now being driven on the back of the digital platforms that we have. And given that we are seeing good traction, we are seeing also larger deal sizes. We have, in the past won some, we are on the verge of winning a few more. We have recently been covered by Gartner in the Magic Quadrant and that speaks volumes of our offerings. We've won a few deals that are $1 million, $2 million deals. They are, in a relative sense, still small, but nevertheless larger than many deals. But our U.S. focus is giving us access to a lot more larger deals. And I am really optimistic about these deals.
On the customer experience front, we have an extremely good pipeline. Those deals are also fairly large, anywhere from a TCV of 3 million, 5 million to even upwards of 10 million, and we have won a few deals. And we are right now in the race in several other deals which are looking extremely promising. So there's a lot of -- what we do with digital proctoring. So this is not a call center. So we do a lot of work with data and doctoring, and that's looking extremely promising more so than the Digital Operations. Not that this is a bad area, but it's looking very, very promising. So both of these, I think, our pipeline is looking very robust with large deals in the pipeline. So I'm very confident that we'll have a good run on this front.
In terms of the details of deal wins, I don't think I would be at liberty to disclose some of those details, obviously because they are customer-specific and sensitive. But suffice to say that they are all large enterprises and they are potentially highly scalable. So once you're in a large customer, you can scale and that could become several million dollar deals for us.
And what is the largest deal you have won recently?
Well, in the AFC space, as I mentioned, we won in the last quarter of last year 2 deals totaling to INR350 crores in value. So those are the larger deals. In the BPM space, in the Digital Experiences, we got deals of $10 million to $15 million. And in the Digital Operations, we've got deals in the pipeline, [indiscernible] pipeline of between $2 million to $5 million.
These $10 million to $15 million, single deal you're talking about?
Yes.
Single deal of $10 million to $15 million?
Yes. It's a TCV, total contract value, obviously, to be executed over maybe 3 to 5 years.
3 to 5 years, okay. So this is -- and what kind of margins these deals will have?
There's a range. Each deal is slightly different anywhere from 40% to 60% depending on the deal and depending on how it takes off. Also, it is -- right now with the current fluidity in the market with the way the costs are going up, that is, I think, a range that -- the way salaries are going up, it's crazy. And [ for that ] we maintain the margin [indiscernible] questionable.
Understand. So you think the potential for growing operations portfolio is...
I just want to clarify, these margins we're talking about gross margins.
Gross margins, okay. And how do you grow -- you're saying that the operations vertical is difficult to grow, because there you have reached the potential already or...
No, no, no. I think we, as I said, have a good healthy pipeline. Our focus in the U.S. is delivering results. Our U.S. pipeline has also increased substantially. And I don't think there's anything restricting the growth. We just have to be sort of -- as long as we deliver well and aggressively sell, there is no challenge that we face on growth. Today, because of challenges in manpower shortage that you see in the industry, but I think that situation is probably going to be short-lived and probably in 6 to 9 months, that should settle down.
So which group can grow faster? Is it the Operations or Technology or Experience?
I think of the 3, Digital Experiences will grow fastest. It was also partly because of a smaller base, followed by Digital Operations, followed by Digital Technologies.
So Digital Experience is smallest or Digital Technology is smallest? Digital Technology I thought is smallest.
No, Digital Experiences is the smallest.
Digital Experience is smallest, okay. So technology includes your metro and all that stuff.
Also, yes.
I see. And I think your experience margin is almost negative margin, isn't it? So how do you get...
23.2% EBIT margin.
EBIT margin, 23.2%. No, I'm getting confused with the technology. I think technology is still lower margin.
Yes, technology is low margin. And in my address, it is right now running at minus 4%.
And you drive that margin up?
Yes. So I did talk about it in my address that there are 5 steps that we are taking. One is, of course, there's a huge investment we made in the product, investments are now beginning to show results, because some of the deal wins will start delivering the benefits that we have invested for. The second is, there was a slight shrinkage in one of our key customers, which is a very profitable customer because they went with a multi-vendor strategy.
The third was that we have 77% of the revenue is coming from India and Middle East. And we are shifting out of India and Middle East towards the U.S. and Europe. And the results are right now in the U.S., our pipeline has improved by about 32%, which is very healthy and slowing down the efforts in India and Middle East and pushing more efforts in Europe and the U.S. The [ focus ] was in terms of de-reading some low-margin customers exiting from those projects and also changing our service portfolio and focusing more on the high-margin offerings and projects and reducing the emphasis on the low-margin one. So a lot of internal pressure on moving away from those.
And finally, we are trying to address the current headwinds with the salary hike that we see across the industry. But I suspect that should settle down in about 6 to 9 months, because the current trend cannot continue for so long.
And what about the automation business? The new one on the block, is it getting better?
That is much better. As I mentioned, we've got 10 new customers in the first quarter of this year. It continues that trajectory which should end up between 40 to 50 new customers in this financial year, which is looking very healthy. Some of those deals are also large deals. But, yes, as they materialize, I'm sure we will talk about it in our quarterly earnings calls.
And what are the deal sizes in this?
It ranges from very small value, sometimes customers are just testing it and they were $20,000, $30,000, $50,000. Some of the better ones would go to about $1 million per annum kind of business.
And potentially this can be $1 million kind of deals, most of them?
They would always start small, $100,000, $200,000 is normal over, say, 2 or 3 years. So you're talking about $60,000, $70,000 per annum kind of a deal. They start like this and then they scale, depending on how well it delivers. So far we've got very good traction. The analyst coverage has been excellent. Customer feedback has been excellent. So so far, we've had very, very good feedback from both the customers as well as -- U.S. and European customers, not Indian customers, and also the analysts like Gartner, Forrester, Everest, these guys. And they are benchmarking us with all the other products in the market, and they give us an extremely encouraging feedback.
And what's the revenue [ for this ]?
So right now, we've not called this out because of a couple of reasons. And therefore we don't disclose these numbers. One is that there is some component of direct customers, and there is some component of indirect customers where we bundle it along with some services. So we need to call that out and we'll go through some motions of sort of segregating our financials. Once we do that, we will be able to give a better picture.
Is there a license transaction, maintenance, application, how does this work [ with the revenue ]?
A lot of it is licenses. And when it's bundled with our thing, it goes on the platform. Platform, when it's bundled with our services, it can be a bolt-on to our workflow. It can be a standalone. So it varies customer to customer depending on what they're looking for.
But is there an implementation costs, maintenance, implementation revenue also or just...
There is a small implementation revenue at the time of improved selling. Very often we would even give that to a partner. It's not just for whatever reason if the customer prefers the Datamatics, [indiscernible] of the partner struggling, then we step in and we implement it as well.
So what is the ratio of license to implementation? Will it be 1:1, 1:0.5, how much is that?
Yes. So I'll answer that. This is Mitul here. So typically it is about 1:4.
1:4, then it's attractive. If is 1:4, it will be attractive.
Yes. So and then it is -- so implemented is first time and then with licenses [indiscernible] every year.
So 1:4, you mean $1 is $4 services for -- they also implementing or the other way?
Yes. $4 of services, $1 of license. Services is time bound, license is annual.
Then this business should grow faster than what it is today, if it is 1:4, that's how the ERP business [ grow ], that's how the hyperscalers are growing, yes? So that is the case why it's not growing.
So the devices part we are trying to give to our partners, because the partners can get us...
Correct, correct. But unless the partners gets 4, you won't get $1 million, which is very profitable.
That is correct. But this is a recurring revenue stream. At the same time, it's license costs. So at some point in time, this financial [Technical Difficulty].
And this license is stable over upfront or how is it stable?
Generally it's paid annually. And of course, depending on the deal, we tend to give payment structures and milestones if the customer wants. But ideally, we take it up front.
So it's more like a SaaS license.
Absolutely, it is a SaaS.
So when do you see it kicking off? When you're saying it's 1:4, it should really kick off quickly unless the potential is going away, because what I see is, when you see the stock prices have automation anywhere, it doesn't say that things are looking good for the industry. So I think you should quickly deploy this and get into your partners making more money, then only you can make money.
Correct, correct, correct. So we have stepped up our marketing activity and sales activity around this quite a bit this year. In fact, last December, we also relaunched our partner program where partners more active in this space, right? We're seeing good traction on there, a lot of partners are much more active and upgrading their skill sets on the product and everything. So we've seen the green shoots, if I have to summarize it. We are hoping we are fairly hopeful on growing this business.
Do you think some of the DSIs will be interested in this?
Sorry?
The Global System Integrators.
Absolutely. So while on one end there are enterprises, but there are global system integrators who are looking at a larger solutioning deal to incorporate the product, and also BPM vendors who are looking at automating processes at the core of their operations.
Have you signed up with anybody? Any global GSI?
So we have TCS as one of our global GSIs. We have many regional players and global GSIs, and especially mid-sized companies are more vertical focused. More reasonable focus, those are the ones which are...
Do they have a serious team deployed for this cause or...?
The smaller and midsized one have, the larger ones because they're carrying multiple offerings and multiple products, have not yet fully kicked in if they compare -- or not compare because they have other engagements with other product companies, but the smaller and middle ones are kicking in quite well.
Do you see a big number coming next year?
This year, yes. This year we will test and if the current run rate of 10 logos in a quarter continues, and we should have about 40, 50 logos within this year, hopefully even more, I think this year will be very crucial for testing the waters. And right now, it's looking very promising.
So when do you see a $5 million, $10 million kind of revenue coming from this?
I think towards the end of the year, we'll get a good sense of where we are. We've got another 3 quarters to go. So I think we'll be in good shape. Maybe after 6 months or 9 months, et cetera, we can have a discussion.
[Operator Instructions] The next question is from the line of Subhankar Ojha from SKS Capital.
So just wanted a better explanation of Digital Technologies, why your margin dropped to a negative 4.5%, for what reason? And what is the outlook here with respect to the margin?
So as explained by Rahul, Subhankar, there were a couple of reasons. So one was, we are investing heavily in our product space, which is into product co-development as well as marketing and sales. So this time, we have spent quite heavily on our sales and marketing products, in addition to the regular product development. Second is, one of our highly profitable -- key highly profitable customer has a sink in business because of a multi-vendor strategy, which is related to shrinkage in revenue from this customer, and that was highly profitable. So to that extent, our margin would compromise.
Third thing is, the demand environment in this IT space, technology space, where we have seen quite unusual increment this time. And that has also resulted to cost increase and margin -- lower margin in this space. So I think, in next 6 to 9, we will need to see next 2 to 3 quarters. And the program will be fixed, but it will take time -- its own time because of these reasons which are obvious and [ executed ].
But I do feel that we get the turnaround within this financial year.
Yes, within this financial year.
2 to 3 quarters from now, we'll see the results.
But if you see overall, we are quite stable in terms of our margins with this business and other businesses. Margins are stable, and we continue to maintain a healthy margin.
Okay. And with respect to this, I mean, you said you've started investing heavily in this. Is there a percentage of sales for this particular particle that you're putting in?
Not as of now as a percentage of sales because right now, the strategy is more to basically capture the share -- market share in this space than putting a budget or putting a percentage to sales, specifically in product and platform businesses.
Okay. And overall, so you said that 15% kind of revenue growth for [ this series ] likely, right? And you expect a stable margin for this year.
Yes, yes.
Despite this particle not being achieving the earlier margin, right? I mean, is that assumption...
Yes, correct assumption.
[Operator Instructions] Next question is from the line of [ Shreya ], a retail investor.
Yes. My question is, are you bidding for any AFC projects outside India?
Yes. We are bidding for some AFC projects outside India as well. Yes, it's correct.
Okay. So can you we some details about it?
There are right now 3-odd large ones, and they would tantamount to approximately $30 million total. But yes, I'm not so sure I would want to give the details of those deals. But yes, we are increasingly focusing on opportunities outside of India.
[Operator Instructions] As there are no further questions, I now hand the conference over to the management for closing comments.
So thank you, everyone, for spending your time with us on this call, and we look forward to connecting with you again next quarter. And thank you for your support and confidence in Datamatics. Have a good day.
Thank you very much.
Thank you, everyone.
Thank you. On behalf of Datamatics Global Services Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.