Q2 24/25

Nov 5, 2024

Summary

Q2 revenue grew 8% YoY, while lower customer volumes compressed margins. Management expects stable H2 performance and partial margin recovery, with AI, alliances and bolt-on M&A among its growth levers.

Please note that this conference is being recorded. I now hand the conference over to Mr. Prateek Jagtap from EY Investor Relations. Thank you, and over to you, sir. Thank you, Tanmaya. Good evening to all the participants in the call today. Welcome to the Q2 FY 2025 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 of Datamatics. In case anyone has not received a copy of this release and presentation, please do write us, and we will be happy to send you all. To take us through the results today and to answer your questions, we have with us the top management of the company, represented by Rahul Kanodia, Vice Chairman and CEO, Mitul Mehta, EVP and Chief Marketing Officer. Rahul will start the call with a brief overview of the quarter on business, then talking on financials, and then we will open the floor for Q&A session. I would 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 a forward-looking statement 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 reports, which you can find on our website. With that said, I now hand over the call to Rahul sir. Over to you, sir. Thanks, Prateek, and a very warm welcome and wishing everyone a very happy Diwali. Thank you all for joining our Quarter 2 FY 2025 earnings call. I will briefly discuss some of the key quarterly and half-yearly highlights, followed by updates on the financials, after which we will open the floor for Q&A discussions. Our total revenues for quarter 2 stood at INR 406.8 crores, giving us a revenue growth of 8% on a year-on-year basis. Our EBIT for quarter 2 stood at INR 39.3 crores, and our EBIT margin was 9.7%. Our total revenues for H1 stood at INR 800.7 crores, giving us a revenue growth of 4.3% on a year-on-year basis. Our EBIT for H1 stood at INR 81.9 crores, and our EBIT margin was 10.2%. Our revenue growth has been primarily driven by new client acquisition across all three business verticals, which is Digital Technologies, Digital Operations, and Digital Experiences. However, we faced margin compression in the quarter due to lower volumes of tax processing business. In this quarter, we continued our investments in Finato and AI solutions. Google has recognized us as a strategic partner for back office of the future, and we have also partnered with Microsoft and developed our own Copilot solutions focusing on process automation to accelerate business transformation for organizations. We continue to augment our sales and marketing efforts by hiring in U.S.A. and Europe and participating in industry events and conferences. Our business continues to progress according to plan. This quarter, we expanded our client portfolio by adding 12 new customers. Regarding our recent acquisition of Dextara, I would like to inform you that the integration is in progress and is progressing well, and the teams are collaborating actively on new opportunities. We have already seen two wins for Salesforce-related services in quarter 2. The transport and logistics business continue to be a key focus for Datamatics across all our lines of businesses. We have 15 customers in this segment. In quarter 2, we added a global logistics leader handling cargo movement across 180 countries as a customer. For this customer, we will implement Finato for finance transformation in over 50 countries. We have been strengthening our leadership team by bringing in senior management talent and have augmented our board with the introduction of Dr. Avnish Kshatriya, Kanika Mittal, and Himanshu Verma. We extend a very warm welcome to them as part of Datamatics family and are confident that their extensive industry expertise will contribute significantly to our continued success. As you may know, our former CFO, Sandeep Mantri, left the organization last quarter. I am pleased to introduce our new CFO, Ankush Akar. We warmly welcome Ankush to Datamatics and to our investor calls. Ankush, would you like to say something? Hello, everyone. I am excited about this new opportunity and looking forward to talking to you next quarter. Thanks, Ankush. Since Ankush has recently joined, I will be presenting our financial performance for this quarter, and Ankush will address you starting next quarter. Let me start with the financial performance for Q2 of FY 2025. Our Q2 FY 2025 revenue stood at INR 406.8 crores, up by 3.2% on a quarter-on-quarter basis and 8% on a year-on-year basis. Our EBITDA for the quarter was at INR 48.8 crores, which is down by 5.1% on a quarter-on-quarter basis, and our EBITDA margin for the quarter was at 12%. Our EBIT for the quarter was at INR 39.3 crores, which is down by 7.7% on a quarter-on-quarter basis, and our EBIT margin stood at 9.7%. Our quarterly PAT after NCI was at INR 42.4 crores, which is down by 2.6% on a quarter-on-quarter basis, and PAT margin stood at 10.1%. Our tax rate for the quarter was at 19.9% compared to 16.4% in the last year same quarter. The primary reason for the increase in the profit mix of the various geographical entities that we have. Our EPS for the quarter was at INR 7.18 per share as compared to INR 7.37 per share in the last quarter. When we see segment-wise revenue performance, our Digital Technology revenue was at INR 162.2 crores, a growth of 0.5% on a quarter-on-quarter basis and 5.5% on a year-on-year basis. Its EBIT margin was at 4.2%, and its contribution to the total revenue was 40%. Our Digital Operations revenue was at INR 176.6 crores, a growth of 7.1% on a quarter-on-quarter basis and 7.3% on a year-on-year basis. The Digital Operations EBIT margins stood at 12.5%. It contributes to a total revenue of 43%. Our Digital Experiences revenue was at INR 68 crores, a growth of 0.2% on a quarter-on-quarter basis and a 16.2% on a year-on-year basis. The EBIT margin stood at 15.2%. Its contribution to the total revenue was 17%. We continue to maintain a healthy balance sheet. As on September 30, 2024, our net cash and investments stood at INR 615 crores. Our DSO was at 58 days as of September 2024, as compared to 61 days as of June 2024. In terms of geographical footprint, the U.S. remains our largest geography with 56% of our business coming from here, followed by India at 22% and rest of the world, including U.K. and Europe at 22%. In terms of industry footprint, technology and consulting was the largest segment for us, which constitutes 27% of our revenues, followed by BFSI, which stood at 23%, followed by education and publishing, which was at 15%, manufacturing, infrastructure, logistics, collectively all stood at 13%, and nonprofit or government organizations at 10%, retail at 8% of our business. The rest of all the other segments were 4%. Our client concentration remains very healthy with the top five, top 10, and top 20 contributing 21%, 36%, and 51% respectively. With this, I will now pass on the call to the operator to open the floor for questions. Thank you all for your patience and continued interest in Datamatics. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Grishma Shah from Envision Capital. Please go ahead. Yeah. Happy New Year to the management team, and thanks for taking my question. I am keen to understand two things. One, what is the outlook going ahead now that we have crossed the first half? How is the integration with the last acquisition that we did in Q4? How is that acquisition panning out? And why is the Digital Technologies EBIT margins at 4.2%? That seems to be quite too low, and even in Digital Operations, we have not seen these kind of EBIT margins before. Yeah. To take your question, thanks, Grishma. The integration with Dextara is going well. It is very smooth, as I mentioned in my address that we have already closed two deals. We are chasing a few more deals, which is a whole cross-sell initiative that we have taken. So, so far it is so good. The sales cycle, as you know, in this business is about nine months. I did not expect anything substantial happening in the first two quarters. But from an integration point of view, both the teams are working very well together. To your question on Digital Technologies margins, as we have mentioned in the past, we continue to invest in the AI space. That is one reason, and that is significant in terms of investments. The second is that we have a large portion, which is the India-centric business, and India-centric business tends to be lower margin anyway. To address that, we are pivoting to the U.S., and we have augmented the sales team in the U.S. particularly, and also in Europe, and I think that should start showing some results, hopefully in the next two, three quarters. In terms of Digital Operations, we had a volume shrinkage, which was rather unexpected because the customers themselves had a volume shrinkage in the U.S., and that caused the impact on the Digital Operations. Hopefully, the customer turns around and they come back to speed in the future quarters. Once that happens, we will also bounce back. I think the outlook for the next two, three quarters, I think we will be able to claw back some of the erosion we had in this quarter, and I am quite optimistic that it will remain stable. Okay. What is the outlook going ahead given that first half is already done? As I mentioned, I think we will have a stable next two quarters, and we will be able to claw back some of the margins that got eroded in the last quarter. Okay. So we would grow only 4%-5% this year. Is that the case? That is correct. We are of course, in dialogue on some M&A, but they are dialogues. No deal happens till it is not happened. If we have any acquisition, then obviously some of the outlook will change. But as of now, you are right, we will maintain a stable current level performance. Okay, fine. Thank you and good luck. Thank you. Thank you very much. Before taking the next question, we would like to remind participants that you may press star and one to ask a question. I repeat, you may press star and one to ask a question. The next question is from the line of Farhad Bamji, who is an individual investor. Please go ahead. Yeah, thank you very much. Good evening, everyone. My question is as follows. In my experience, most Indian companies aspire to grow at 2 times the GDP, and smaller companies aspire for slightly higher growth because the base is less. If I look at our investor presentation in the last 10 years, we have grown at approximately 7.8% CAGR. That is substantially lower than what most companies would aspire to be. So my question is, how are we looking at growth going forward? Are we aspiring a 15%-20% growth going forward? Do we have any strategy to be a billion-dollar company, for example, in four, five years? Is there any strategic thinking on those lines? Yeah. We are, and our approach for achieving that kind of a growth is predicated on three or four key elements. One is our alliance with the hyperscalers. We have talked about that. We are investing very heavily in the whole AI space. Google has recognized Datamatics. Microsoft has recognized Datamatics. We are getting some good traction from whatever we have done with them in the market. We have stepped up our activities in participating in events both in Europe and the U.S., and they are giving us good traction when it comes to things like Copilot and AI. That is one area. In that space in particular, it is not the size that matters, it is really your ability to move fast, and we are moving as fast as we can. That should result in some growth. Point number one. One is the hyperscalers bolted on with the whole AI angle. The second is the M&A. We have a very healthy cash balance, and we have done an acquisition in the last two years. You have seen we have done two or three acquisitions, the latest one being Dextara. We are in dialogue with a few more companies, and as they materialize, obviously that will give a boost to our growth. Then, of course, we leverage that from a cross-sell point of view and all of those things. The third is that we have augmented our sales team in the U.S. and Europe, and we are also stepping up the marketing. I think a combination of pushing the sales team more, augmenting the team in the investments we are making in marketing, the alliances with strategic partners like Microsoft and Google, and the acquisitions, all put together, will give us some of the boosts that we are looking at in terms of the growth rates. Thank you. That was very helpful. Again, to just reiterate, given that last 10 years we have grown at a CAGR of 7.8- Yes. Would you all come up with some sort of a statement or strategy to say that we're changing gears and we're looking at more of 20% plus kind of CAGR or closer to higher teen CAGRs than single-digit CAGRs? Would you all come up with some sort of a thinking or strategy or statement around that? Well, we are working on that, and you may have noticed we've also augmented our board, and we've inducted several different people who are experts in the industry. So we are changing teams both at the board level as well as the operating management team. I'm confident that we will be able to come back with a more refined strategy for growth. Our business planning will start in January, so I think in the next quarter, which is Jan, Feb, March, we should have our plans baked in for the growth that we're looking at. So maybe around the year-ending quarter, we should have a little more insight into the strategy for achieving those growth numbers. That's really great. Much appreciated. Wish you a lot of good luck, and I would love to see our company be a billion-dollar company in the next four or five years or so. Would really wish for that. Thank you very much, and that is our ambition as well. Thank you very much. Great. Thank you so much. Thank you. Thank you very much. Before we take the next question, we would like to remind the participants that you may press star and 1 to ask a question. The next question is from the line of Nikhil Goktawe from Kizuna Wealth. Please go ahead. Hello, am I audible? Yes. Yeah, hi sir. Can you just highlight some points on our top 5 client concentration? It has declined from 25% to 21%. Can you just highlight something about that? That decline is largely because of some volume reductions that we saw, and I mentioned that in my address as well. Essentially, it's a volume reduction that's causing it, and that was partly because of the softness that we saw in the markets earlier. Although we do see markets picking up, and if you may recollect that we signed 12 new logos in the quarter. So in terms of new customer acquisition, it's healthy. It's just that a few of the larger clients had a volume shrinkage, which is what impacted. I am sure that they will bounce back soon, and with them we will grow as well. Okay, sir. And sir, my next question is about more of a macro environment. How do you look at the macro environment going forward in the spaces of BFSI or different verticals? How the interest rate are going to impact? Can you just provide some of your views on that? These are my personal views. I think the U.S. Fed is reducing interest rates, and they will do that a little more because they do need to spur the U.S. economy. Once that happens. However, having said that, there is of course this looming issue of a war in the Middle East. We look at Turkey revving up, you look at Iran making some moves. Israel, of course, is getting aggressive. So there's some degree of uncertainty there. There is also, at this point, as we speak, some uncertainty in the U.S. with the U.S. elections. But that should be settled very soon because I believe the elections will be announced today, U.S. timing. So that uncertainty hopefully should go away soon. But Europe remains in sort of a little bit of a doldrum, if I may. The economy is soft. If you see North Korea getting involved with Russia in terms of supporting Russia in the Ukraine war, that is some cause for concern. So overall, on a macroeconomic expectation, apart from the uncertainties of war in the Middle East and Europe, I think we should be all right once the U.S. elections are over. That should be in another day or two, we'll get the results. The U.S., with them reducing the Fed rates, interest rates, I think the U.S. economy will bounce back, and things should look better. Okay, sir. Thank you. That is it from my side. Congratulations for a good set of numbers, and all the best for the next quarter. Thank you very much. Thank you very much. Before we take the next question, we would like to remind participants that you may press star and one to ask a question. The next question is from the line of Sanjay, who is an individual investor. Please go ahead. Hello. Mr. Sanjay, your line has been unmuted. Please proceed with your question. Yeah. Am I audible? Yes, you are. Hi. Good evening. I have two questions. Sir, in the last quarter call, you mentioned that the margins will get expanded by 150 to 200 basis points in Q2. We see, I think, instead of expanding, it's contracted. What are the reasons, and are we seeing now the margins get better in Q3? Or we have to wait till Q4? That's the first question. Yeah. To your question, as I mentioned, there was some unexpected volume de-growth from our customers because their volumes decreased. That is really what impacted us. That was rather unexpected. Having said that, we have taken further steps on automating and tightening our belt. I think we will, in the next two quarters, Q3 as well as Q4, claw back some of those margin erosions. That will happen for sure. We are now in Q3, so let's see how this quarter ends. But whatever steps we are taking shows that we will be able to claw back some of the margins. Okay. Thanks for that. About the annual increments, is it given to all employees already, or it is scheduled in this quarter? No. The increments are given. The next increment cycle will be in Q1 of next financial year. For this year, there is no further increment as such. Oh, okay. Generally, we have H2 generally is better than H1, and Q4 is generally on higher side. That trend will continue this year as well, right? Yes. Q4 tends to spike, and we will see a spike in Q4 anyway because we have that very cyclical business in our financial F&A business. All right. Thank you very much, and wishing you all the best. Thank you very much. Thank you very much. Before we take the next question, we would like to remind participants that you may press star and one to ask a question. The next question is from the line of Amit Akeja from HThava. Please go ahead. Good evening, sir. Am I audible? Yes, sir. Thank you for giving the opportunity, and congratulations for good set of numbers. Greetings to all for the festive season. My question was with respect to what are the initiatives being taken for artificial intelligence, like the investment being made and the impact on the revenue, and how are the new products being taken up in the market? We have taken a lot of steps, and we've invested significantly on the whole AI space. I think we are, in many ways, ahead of the curve, if I may, in terms of the kind of solutions that we've built. We've started taking them to the market, and we are getting some very good response from the market. Mitul is on the call as well. Maybe Mitul, since you are attending a lot of these events, maybe you want to say something on that. Just to conclude on that, we are getting some good responses, and hopefully in the next quarter or two, we are able to close a few deals. Mitul, do you want to add to that anything? Yeah. I actually have been traveling across U.S. and Europe over the last couple of months. We see a huge opportunity, especially on the Copilot and on that front, where a lot of enterprises have taken the first step to go ahead with Copilots into their enterprises. Now they're looking at how that can be further leveraged into their enterprises there. That's where the service providers like Datamatics come in, where we can extend the usability of Copilots into their organization. Those conversations have been very promising, and we're hoping that would be strong. Also, a lot of customers are looking at applications which will natively have AI built into it. That is where we are upgrading Finato, which is our CFO transformation platform, and bringing in all the built-in features of automation, AI, analytics into it, which makes a CFO back office more modern and alive for the next about decade also. I think that, in short, that would be where we have the AI opportunity. Some of the investments that we've made has been also recognized by Google and Microsoft, which is very good because when you have partners at that scale and those kinds of companies, they bring opportunities to you and they present us very good avenues for growth. Any color on the investment being made in that? No, we are not tracking that very specifically for multiple reasons. AI is permeating every part of the operations and every product and platform that we have. We've got little things going across the board. Therefore, if you just look at an AI layer per se, it's difficult to identify exactly what is AI and what is not because a lot of the existing teams are also sort of pivoting into AI, and then we've got a whole AI team also working on it. I don't have a number at the tip of my fingers, but perhaps we can collate that number and track it for the investors going forward. I need to do some homework on that. Okay, thanks a lot. I wish you all the best for the future. Thank you. Thank you. Thank you very much. Before we take the next question, we would like to remind participants that you may press star and one to ask a question. The next question is from the line of Jatin from Choice Broking. Please go ahead. Hi, good evening to all. I just have one question. With recent acquisitions like Dextara Digital, what are the areas or capabilities is Datamatics targeting for future acquisitions to enhance its product offering or geographical reach? Yeah. Dextara was focused on Salesforce, and with them, we have showcased in the Salesforce event that was there in Washington, Seattle, no, in San Francisco recently. We've gotten a lot of AI flavor to that, which was really appreciated by a lot of the customers. Our going forward targets are around cloud, data, digital content. I think these would be, and maybe customer experiences. We're talking to several companies in this spectrum. All of these areas, whether it's digital experiences, digital content, cloud, or data, will augment our existing business. We're not acquiring to get into a new space. We're just going to use them as bolt-ons to our existing business to deepen the expertise and competence that we have. And of course, by default, when you acquire, you get a bunch of new customers as well. It will add to customers, it'll add to our capabilities and depth. We're not looking at a geographical expansion or a new area that we are not present in. Okay. Thank you. Best of luck. Thank you. Thank you very much. Before we take the next question, we would like to remind the participants that you may press star and one to ask a question. The next question is from the line of Sanjay, who is an individual investor. Please go ahead. Yeah. Thank you for the opportunity to follow up on my previous question. Sir, you mentioned about the Google partnership, I think, because Copilot is already, I think, announced, and it was probably last quarter it was theirs. Is it a recent partnership with Google, and how is that going to help in getting the business? Yeah. So yeah, it is a recent development, and Google is taking us to their customers, and they are coming along with us to our customers. There's a much stronger collaboration where we're doing a joint go-to-market or they are bringing opportunities to the table. As those opportunities materialize, we should see an uptick in the business that we get around Google's AI, which is Gemini. Oh, that's great. Was there any announcement or are you planning to do an announcement? We will make an announcement soon. It is very recent. We are still working on some of the press releases in mix of that. Some paperwork is due, but yeah, we will make an announcement soon. Oh, that's really great update and wishing you all the best. Thank you. Thank you very much. Participants who wish to ask a question may press star and one at this time. I repeat, participants who wish to ask a question may press star and one. As there are no further questions, I would now like to hand the conference over to the management for closing comments. Thank you everyone for being on the call. I really appreciate the time you spent with us, and I wish you all a very happy Diwali once again, and prosperous new year. I look forward to speaking to you once again at the end of next quarter. Thank you again, and bye for now. Thank you so much, sir. On behalf of Datamatics Global Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.