Q3 23/24

Feb 8, 2024

Summary

9M FY24 revenue rose 4% YoY, while EBITDA grew 75% and PAT reached INR 97 crore. Customer delays weighed on growth, but the $2bn pipeline supports a double-digit FY25 growth outlook and a 10% EBITDA margin ambition.

Ladies and gentlemen, good day and welcome to the Q3 and nine months FY 2024 earnings conference call of Black Box Limited. This conference call will contain forward-looking statements about the company, which are based on the beliefs, opinions, and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. As a reminder, all participants' lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjeev Verma, Whole-time Director and CEO of Black Box Limited. Thank you, and over to you, sir. Thank you. Hello, and good morning, everyone. I hope you all are keeping safe and healthy. On behalf of Black Box Limited, I welcome everyone to our Q3 and nine-month FY 2024 earnings call. On the call, I am joined by Deepak Tandon, Executive Director and Global CFO, and SGA, our investor relations advisors. We have uploaded our results presentation on the exchanges, and I hope everybody had an opportunity to go through the same. We are happy to meet again. We will start with a brief overview on the company followed by business and financial performance for Q3 and nine months FY 2024. Black Box stands as a prominent global ICT solution provider, specializing in designing, deploying, and managing digital infrastructure solutions for our esteemed global enterprise clientele, including Fortune 500 customers and cloud providers. Our footprint spans 35 countries and is bolstered by over 4,000 ICT professionals. Leveraging our expertise of Co-ClickNow, businesses can develop and deliver pertinent technological solutions and services aligned to their core business goals. Our strategy of Glocal, which is Think Global, Act Local, enables us to maintain meaningful relationships globally while ensuring relevance and flexibility to our customers. This approach allows for cost-effective delivery across 35 countries, facilitated by our center of excellence situated in India. We have reported an exceptional performance in Q3 and nine months FY 2024 in terms of improving our margins and overall profitability. Our emphasis on cost rationalization and enhanced productivity has begun to generate positive outcomes, helping us to deliver good numbers. Projects order backlog for North America continues to be strong. Just to highlight the trend for projects, order backlog for North America, which was $101 million in December 2021, increased to $185 million in December 2022, and further increased to $193 million in December 2023. So year-on-year, over the last couple of years, we have seen good growth in terms of order backlog. However, we saw some shrinkage when compared to September 2023's order backlog of $233 million. Deferred capex plans at the customer end coupled with slow decision-making and consistent execution of projects of our end on quarter-on-quarter basis led to a lower than anticipated order backlog. On new projects, deal wins for the quarter were in excess of $15 million. However, it was below our internal estimates, and we are confident that deal wins will gather momentum over the next few quarters given the robust pipeline and hyperactivity in the AI and edge data center and cloud space. Our overall pipeline at around US$2 billion stands at the highest ever level. During the quarter, all our business lines have been strong traction with significant contribution from projects and managed services in the areas of data center and digital efficiency, modern workplace and customer experience, networking and cybersecurity, and control room solutions. As we have highlighted in our past call as well, we believe that the market, propelled by the influence of hyperscalers and cloud providers, is poised for substantial growth in the coming years. We anticipate seizing these opportunities with our superior design and execution capability both in North America and international markets. We are currently engaged in active projects with 3 out of the 5 major hyperscalers. In addition, we are also serving some large customers in the enterprise domain. We remain focused on our endeavor to enhance margins and profitability. Although we have seen some delays in decision-making from customers, which has impacted our revenue growth in short term, we remain optimistic about sustaining the profitability momentum. We are confident of remaining within our stated EBITDA and PAT guideline range for the year. That is my side. I now hand over the call to Deepak to run through the financial highlights. Thank you, Sanjeev, for the detailed overview. Good morning, everybody. I will now discuss our financial performance for quarter 3 and 9 months ended FY 2024. Our strategy is to focus on large revenue customers has started yielding results, helping us to achieve best 9 months performance across all the financial parameters. Starting with the performance for 9 months, our revenues witnessed a growth of 4% year-on-year to INR 4,801 crores from INR 4,606 crores for 9 months FY 2023. On a quarterly basis, our revenues for quarter 3 of FY 2024 stood at INR 1,655 crores, which is a growth of 5% quarter-on-quarter and muted on a year-on-year basis. Some delay in decision making at the customer's end led to delay in getting new orders, thereby leading to muted performance in quarter 3 FY 2024 on a year-on-year basis. If we look at EBITDA, we are happy to report a robust 75% growth year-on-year to INR 306 crores in 9 months FY 2024 compared to INR 175 crores in 9 months FY 2023. For quarter 3 of FY 2024, we have achieved EBITDA of INR 116 crores, which is a growth of 62% year-on-year and 15% quarter-on-quarter. We have seen a consistent growth in our EBITDA margins. For 9 months FY 2024, the EBITDA margins increased to 6.4%, which is a growth of 260 basis points year-on-year compared to EBITDA margins of 3.8% in 9 months FY 2023. For quarter 3 of FY 2024, EBITDA margins grew by 270 basis points year-on-year at 7%, compared to 4.3% in quarter 3 of FY 2023. Our emphasis on cost rationalization and enhanced productivity continue to produce positive outcomes, consequently leading to an increase in our EBITDA margins. Coming to profit after tax, 9 months for FY 2024, profit after tax increased to a robust INR 97 crores as compared to INR 1 crore for 9 months FY 2023. Profit after tax for quarter 3 of FY 2024 increased to INR 31 crores as compared to INR 8 crores in quarter 3 FY 2023, witnessing a growth of 5.2 times year on year. Our robust operating performance has resulted in better profitability despite higher interest rates. Our additional emphasis on profitability in recent quarters continue to yield favorable results, and we are confident that this positive trajectory of improvement will continue in future. We have seen a substantial increase in our EPS at INR 5.76 per share in 9 months FY 2024 against INR 0.04 per share in 9 months FY 2023. For quarter 3 of FY 2024, the EPS for the quarter increased to INR 2.43 per share versus INR 0.47 per share in quarter 3 of FY 2023. In summary, we have seen a good uptrend in our EBITDA and profitability, and we expect to witness the same trend going forward and expected to remain within the stated EBITDA and PAT guidance range for the year. That is all from my side. I will now request Manjeet to join me for Q&A. Thank you very much. We will now begin the question and answer session. Participants present on the audio bridge who wish to ask a question may press star and 1 on their touchtone phone. If you wish to remove yourself from the question queue, you may press star and 2. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Vivek, an individual investor. Please go ahead. Hi, this is Manjeet. Thank you for the opportunity. Manjeet, you have done a tremendous job on the margin front. When do we start to expect some traction on the top line? I mean, given the fact that we have gone public with a three-year stated goal of hitting 60,000 crores. I mean, a lot of it will come from acquisitions, I am guessing, but how do you expect revenue growth to pan out in Q4 and in FY 2025? If you can give me some color on that. Sanjeev, you have raised a few questions where I'm a little choppy and not able to hear very clearly. I think I got the last one. You were looking for 2024, 2025 guidance, is that I heard? You heard something about the target question correctly. No, I'm sorry. I can repeat it if you want me to. Yes. Can you just repeat, please? Yes. I'm saying we've done a tremendous job on the margin front. When do we expect to see some traction on the top line? I mean, will Q4 be better from Q3, and how do you expect fiscal year 2025 to pan out, given that we've gone with a stated goal of INR 15,000 crores? Of course, part of it will come from acquisitions, but just how do you think the environment is playing out? Do you see any- Thank you. Thank you. I got it. Sorry, I couldn't get the question. I think as I mentioned earlier, we are seeing kind of a mixed bag in our portfolio of business from the customer set. From our hyperscalers, we are seeing hyper activity pertaining to making fast progress on creating AI-led data centers for those other projects we do. On the other side, large enterprise clients are little cautious with respect to various environmental factors, including interest rates, inflation, and so on, so forth. We are seeing a little bit of softness and delay from a softness perspective, and I think that's what I quoted earlier. From a perspective of what we had told going forward of a goal for focusing at $2 billion, I think that's where our focus is, which of course, would include some element of being inorganic as well. We're expecting guiding fiscal 2024, 2025 from a double-digit growth perspective. So the softness is pertaining to saying, okay, there's a little bit of a delay. So the hyper activity on data center, the device market opening up and interest rates softening down the year. Robust pipeline, as I said earlier on, of about $2 billion overall, gives me a good confidence. As we move forward into the next fiscal year, we would be looking for maintaining or growing our growth momentum in double digits going forward, targeted towards growing our growth of being at $2 billion for the next three years' time. So that's consistently a thought process from a medium-term perspective. Since a portion of our double-digit growth, I mean, this year it seems very difficult. What gives you the confidence that 2025 will be slightly better? I mean, as I said, the margins, we seem to be on target and think even further than what we had expected. What gives you the confidence that next year we should see some traction on the top line? I mean, are you seeing any improvement on the margin as far as the deal momentum is concerned? I think, as I said, we are seeing already the improvement on margin and productivity and we take a little bit of that. If you heard what I said earlier on with respect to our deal pipeline, which is a leading indicator, is very strong. The deal sizes are very strong. We're serving one hyperscaler as a major partner. We're moving to three hyperscalers as major partners going forward. So deal pipeline, the advent and the focus on AI that will drive large-scale data center investments and cloud transformation. We've built that digital infrastructure and the pipeline is strong, higher than it was before. So combination of those, I think, and our investments in focused markets, focused verticals, gives me the confidence that we are looking at much better year-on-year growth with respect to our revenues in fiscal 2025 as well going forward. Just one question on the margin front. I mean, we are at the 7% rate. Do we expect to see improvement in the next three quarters? I mean, you spoke about a 10% margin goal over the next three quarters. Are we on track for that? Because I am guessing we can only go so far if we do not see any top-line growth, right? Any improvement, I am guessing a big chunk of it would also need for us to go on the top line. Yeah. As I said, I think we have been improving our focus on deal margins by better selling and cost agility. We expect to keep on track to achieve our goal of 10% margin as we move forward into the next fiscal year we will be on. So that is our goal. We have come over the last several quarters from one of lower single digits to a really higher single digits at this time. Then we will move forward better that as we have seen Wipro going forward as well. And with increased revenues going forward, I think that will only help us to achieve our goals toward achieving a 10% margin goals. Okay. Thank you. That is it from my side. Thank you very much. The next question is from the line of Akshay Jain from Jain Capital Investment. Please go ahead. Yeah. Hi. A couple of questions from my side. Firstly, our TPS business did face some challenges a couple of quarters ago. Can you provide some insights on how is the current performance of the business, and are you still facing any challenges that we have faced in the past, or we have mitigated all the concerns? Yeah. Our TPS business remains up in the range of 12%-15% of overall business. We have had some supply chain and product challenges. We have re-looked at that over the last couple of quarters, augmented our focus on our own IP-led products, largely on control rooms, and narrowed down our focus on fewer products that have higher margins. We expect getting into fiscal 2025 that we would be coming out of it much stronger Product line focus, higher margins in the TPS business as well. The difficulty we face in TPS coming into our supply hardships and other supply chain issues are over. As we get into our new motion, we are investing in R&D. We are expanding some of our product portfolio which have high-yield margins, and we are dedicating our focus into specific business lines where our competitive positions are very attractive. Getting into fiscal 2025, we expect to see a reasonable growth in our TPS business and our profitability as well from this business. Okay. Yeah, that's helpful. Secondly, just continuing what previous participant had mentioned, the end profitability has been great, so congratulations on that front. But again, the revenue numbers seems little chippy. Just any more explanations towards that, and how is the order win and project backlog shaping up as it seems subdued currently? Yeah. I think I said before. We have a short-term blip and I think when we build a business, we should review the term in long term. We cannot look at it every morning. We have a kind of a softness, a little bit of a delay with respect to some of our enterprise customers rolling out projects and/or delaying certain projects with the execution as well. Having said that, at the other side, set of our customers and business lines, more specifically in the data center networking, continued to push harder. I think a combination of a good push part of our customers in the enterprise segment business flow has affected in the short term. But I think our overall pipeline on which we update our go-forward order book is very strong, as I said, it is $2 billion. Expectation with respect to more adoption of cloud, more adoption of AI that has been talked about and more adoption of more IoT devices coming onto the network and the capacity plans are getting made both overseas and India. We expect our order momentum at the back of a very high pipeline to mature and ease. Therefore, this is a temporary element, we have a little bit of a deferred growth than what we said. We expect to gain back a double-digit momentum going forward in the next fiscal year. Sure. Thank you on all of this. Thank you very much. Ladies and gentlemen, you may press star then 1 to ask a question. Thank you. The next question is from the line of Raj Joshi from SNS Securities. Please go ahead. Hello. Thank you for the opportunity. I have some questions. The first one is that the data center has been a big contributor to our overall performance this quarter, and I believe this is on the back of one of our large social media clients. I wanted to understand, apart from that one large client, have you added any other client in space that is contributing and leading to such growth? The answer is yes. I just mentioned in the early call, I think we are serving three of the largest five. We were serving one I think last year and kind of made it part of this year. The answer is yes, we have announced this and I am prepared to give the specifics in Asia. But we have a large deal of other one not executed yet from large hyperscaler data centers. We are expecting now to partner with the fourth one in the fifth one going forward. We are among the foremost leading companies who has the ability to build large-scale hyperscale data center in partnership with these cloud guys. And I think we have seen momentum in that space, and we remain very confident. Okay. And my another question is, we have a good performance in our EBITDA margin as on nine months FY 2024. How should we look at as on FY 2024 and over the next two years? What is our ambitions and how we would like to achieve that? I think what we have guided that we would be within the range of what we have guided for this year for EBITDA. Going forward, we have stated our goal to head towards to a 10% EBITDA ambition to go forward in the short term, right? And therefore, we will be moving forward as we scale up our business, get better productivity. We have gotten 7%, 8%, 9%, 10% type of goal to get there. Over the next several quarters, we expect to move towards that direction quarter after quarter, as we have done in the past coming up to where we are at this time. Thank you. That is it from my end. Thank you very much. The next question is from the line of Saurabh Wadhwani from Sahasrar Capital Private Limited. Please go ahead. Saurabh sir, there is some disturbance from your line. You are not audible. Am I audible now? Can you disconnect and reconnect? No. Thank you. The next question is from the line of Raj Mehta from Wisdom Capital. Please go ahead. Thanks for the opportunity. My question is, last quarter we highlighted that we have started exiting some of our low-revenue customers. Have we exited from all of such customers? Yes. We have started to readdress our tail-end customers as we speak, and that's the focus area. It's not a one-time process to get there. At the end of the day, we do not want to leave a bad taste to the customer. But yes, we are moving away from our tail-end customers that are disproportionately negative. If we do not see value to the customer longer term, we will be moving that away from the customer. We are taking a two-step approach. First, of course, we are taking the service customer from our remote country vendors into our own trust. The second approach we are taking an approach of increasing our prices to customers. The third is, of course, if it is not suitable for us, we will be moving away. As we start to gravitate towards large volume customers, our cost to serve is important. We want to serve appropriately. Yes, we have to action that. Assessment of the customers, the engagements are going on as we speak. We're taking some actions in quarter 3, which will take us several quarters to be able to realign that as we start to move towards the high-value volume business. Got it. How we are seeing the growth, large revenue customers that we are adding, and what is the scope of growth further? As I said, I think we are looking forward double-digit growth with the next year. I think we have not yet guided yet for next year. I think at the back of a very strong pipeline and the expectation that the enterprise customers, who are slightly slow at this time, will start to ease out in the later part of the year. Combination of large key customers in our networking and data center practice, opening up a little bit of enterprise customers going forward in the second part of the next fiscal year. We expect that we will be able to drive double-digit growth in the next fiscal year. We will provide the guidance towards the beginning of the next fiscal year. Yeah. My last question is that, can you elaborate on detail on why is there a decrement on the CapEx at the customers end, and how we are look at it in the upcoming quarters? I think we look at it because the cost of money is high. Certain customers who are able to. Any business project that enterprise customers might have, they are trying to take a process approach. The labor market remains very tight in America. The cost of money remains very high. The market remains a little bit uncertain. I think although the Fed has announced that there is a rate cut coming in the later part of the year, that hasn't happened yet. It is a process approach to some of our customers. Therefore, the decision-making, as Deepak Tandon said earlier, is a little bit delayed. Having said that, we haven't seen a drop in our pipeline or our engagement with our customers, so we are in regular conversations. Some set of our customers slightly slow, and that has created a tepid environment in our overall revenues that we see in the current year. Right? As we get into our pipeline and get into the next fiscal year, we still remain bullish on our service growth. Got it, sir. Thank you so much. Thank you very much. A reminder to all the participants, you may press Star and One to ask a question. Thank you. The next question is from the line of Saurabh Wadhwani from Sahasrar Capital. Please go ahead. Hi again. I hope it is clear now. Yes, sir. I wanted to understand on the interest cost. It has increased significantly. I wanted to know the reason, and what are we expecting going forward in fiscal year 2025? Yeah. The interest cost, like we all know that there is a high interest rate environment as of now in U.S., and most of our costs including our debt facility and including our securitization facility, everything is in U.S., where the interest cost has gone up from. By facility, we are at LIBOR plus 200 basis points. But LIBOR or SOFR has gone up by almost 5%, 6%, and that is why the interest rate has gone up. Now, in terms of Fed has indicated about taking down the interest rates by cutting the interest rates, which we are expecting that should start from June, July, depending on, again, the inflationary data and the inflationary environment in U.S., how it evolves and everything. In next one year timeframe, we are expecting that the interest rates should go down again. Should start going down quarter on quarter. This is directly linked with the Fed reduction most of the interest rates. That is where we are. In terms of the interest rate as compared to last year, the interest cost has gone up because we have grown little bit of more debt in terms of almost INR 15 crores, INR 20 crores more debt that has gone up from last year to this year, around INR 20 crores. So the cost of debt is also coming in, but mostly it is because of the interest rate increase in U.S. Okay. Sure. Yes. Thank you very much. The next question is from the line of Vivek, an individual investor. Please go ahead. Hi. I just wanted to get a clear understanding. I mean, given our peers in the space like Intral or DCB or Convergint, they are much larger in terms of talking, right? What is our right to win when we are competing against them in deals? I mean, what I'm trying to get at is that, in terms of the capability set within our company, do we think we're there or do we need to invest a lot more in people and processes and systems. I'm just trying to get an understanding as to if the market environment changes, will it be a cleaner run for us or are just not there in terms of what great an option to the customers? I mean, Centrill is at a $16 billion run rate. We are clearly at one. When we are competing against, I'm just naming them as that market giants. So what is our right to win when we are competing against some of the bigger players in the industry? Thanks. Great. A very good question, actually. I think if you look at the right to win or brand permission, as we call it, I think it is earned over a period of time. It is a factor of capability and talent. It is a factor of network presence across geographies, because large clients have footprints. Are you able to support that? It is also a matter of scale. Do we have the scale to be able to do that? I think in all the three fronts, I think if you look at our right to win, I think our network of operations spanning 35 markets mimics large operations and larger players in the field. Therefore, contextually, from local or regional players, even if they are larger in volume, contextually, we can be different. If a customer wants to deploy our services in other markets in U.S., in Europe, basically, we are present. We have a little bit of an edge to be able to right to win. With respect to our capability and talent, now with our investments in Bengaluru and our local talent, what I call it local, I think we are very covered and able to bring to market a good talent pool much better than, again, our local peers. That leaves us a unique spot where we possibly can compete with a larger client, but only similar to scale. We are currently at $600 million ballpark of a size in the plus or we are the client. I think so this leads for us to grow. I think we are growing and winning in a specific area. We don't want to be everything for everybody. We are very strong in certain areas of networking, which is the bedrock of next generation applications will run. Data centers is where everything will be hosted. We are able to compete there. I think a mixture of our presence worldwide, talent worldwide, and gaining scale allows us that contextual differentiator to be able to right to win. Again, the idea is to get considered more. If you're getting considered more, the chances of winning increases, right? We are working every day, every morning to be able to increase our right to win. We have been able to get a leg up from regional domestic players here, purely for global customers. But then again, we have large players who, and therefore, we need to build up experience. I think we feel reasonably good that we are getting moving forward in the right direction. We're also looking forward getting into the next year to realign our focus more deeply into verticals and practices that we do and more to go to back and forth in the future, how we aligning to those markets, what kind of talent we need to bring. Net-net, I think we are making progress with respect to our brand permission and right to win. That will answer the question. And just one last question, I do not mean to be dwelling. I just feel that as the environment stands right now, I mean, in terms of certain countries, do you still expect or is it double-digit growth next year hinged upon inflation rates? I mean, as things stand right now, are you reasonably confident that you can maintain double digits for next year? Or is that basis a lot of No. I think I am looking at my overall key things we look at. We look at the potential in the marketplace, the portfolio I have, and the people I have, the three things. The partnerships we bring with others. And I think that gives me confidence with respect to technically in two of our out of the four portfolios, two portfolios are super growth. Most specifically, cloud infrastructure, data center, and refreshing of the network from the legacy network to actually buy networks, 5G and so on and so forth, which we are seeing even in India or any part of the world. And those two pillars are very strong pillars for us. So we will expect that for right to grow. A very large part of our pipeline, for example, our data center business pipeline was $200 million or $300 million a few quarters back and it is about $1 billion now. So the fact of our pipeline is a leading indicator. The conversations we are having gives me an optimism for a double-digit growth going forward in the fiscal 2025. Okay. And on the acquisitions part, are we looking at any companies? I am just going to understand because the three-year targets are $2 billion. I am just, I mean, we will have to do it in bits and pieces, right? I mean, can you just give us some color on how you are thinking about that part of the strategy? Yeah. So I told that before, and I think we are not actively, and if the time comes, we will definitely let you guys know. I have told that before. Our thesis are not to be emotional about economics. We will not be emotional about the economics. Yes, we are open for inorganic path as well. That is not our focus area every day we wake up. We believe there is a strong growth in organic, but we remain open. I think as a growth company, we have said that before. I think if it is accretive for us, if it makes sense in a certain market, we would. It is not about being emotional, just adding up something. We are focused on organic growth. We see data centers growing. We see that certain markets are seeing technology aspects of AI and machine learning and cloud transformations being very, very hyper. We have some play there, as you know. So we remain focused on that, but we remain open with respect to seeing what is the possibility. To that extent, if something comes, we are not into any active engagement, something to talk about now. But if something happens, we will consider if it makes sense for us to do this. All right. Thank you. Thank you very much. A reminder to all participants, you may press star then 1 to ask a question. Thank you. The next question is from the line of Saurabh Wadhwani from Sahasrar Capital. Please go ahead. Saurabh, sir, there is disturbance from your line. Yes, sir. Thank you. A reminder to all the participants, you may press star then 1 to ask a question. As there are no further questions, I would now like to hand the conference over to management for closing comments. I would like to thank everyone for joining on the call. I hope we have been able to address all your queries. For any further information, kindly get in touch with me, Deepak, or our Strategic Growth Advisors, our investor relation advisors. Thank you. Thank you. On behalf of Black Box Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.