Q1 24/25

Aug 1, 2024

Summary

Q1 revenue rose 0.7% YoY, but organic growth fell 2.4% and EBIT margin declined to 10.8%. Management maintained growth targets and expects Q2 margin improvement of 150–200 bps.

Ladies and gentlemen, good day and welcome to Datamatics Global Services Limited Q1 FY 2025 earnings conference call. As a reminder, all participant 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 the star then zero on a touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Pratik Jagtap from E&Y Investor Relations. Thank you, and over to you, sir. Thank you, Steve. Good evening to all the participants in the call today. Welcome to the Q1 FY 2025 earnings call of Datamatics Global Services Limited. The results and presentation 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 on. To take us through the results today and to answer your questions, we have with us the top management of company represented by Rahul Kanodia, Vice Chairman and CEO, Sandeep Mantri, EVP and Chief Financial Officer, and Mitul Mehta, EVP and Chief Marketing Officer. Rahul will start the call with brief overview of the quarter on business, which will be then followed by Sandeep, talking on financial, 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 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 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, Pratik, and a very warm welcome and thank you everyone for joining our earnings call for quarter one FY 2025 today. I will briefly discuss some of the key quarterly highlights while Sandeep will provide an update on the financials. After that, we will open the floor for Q&A sessions. Our total revenue for quarter one stood at INR 394 crores and an EBIT of INR 42.6 crores, including revenues from Dextara. Our revenue grew 0.7% in quarter one. Dextara contributed to 3.1%, hence our organic growth was a negative 2.4% on a year-on-year basis. The de-growth was mainly due to the slowness in the U.S. and European market and a flat growth in our existing business. Consequently, our EBIT margins reduced to 10.8%, which included increments that we gave out for FY 2024-2025, rolled out in quarter 1, and our ongoing investments in building AI solutions. Our sequential quarter basis we see an improvement in EBIT for digital experiences which grew from 11.8% in quarter 4 to 14.2% in quarter 1, an improvement in EBIT for digital technologies which from 0.7% in quarter 4 to 4.6% in quarter 1. However, there was a shrinkage in EBIT for digital operations from 23.5% in quarter 4 to 15.5% in quarter 1. This is not very comparable on a sequential basis due to the cyclical nature of this business. Although our financial performance has been somewhat softer than expected, our confidence in the overall business strategy is steadfast. We remain fully committed to this path. Our business continues to progress according to plan. Datamatics is expanding its delivery centers in Philippines. We recently opened a delivery center, Dumaguete, and we are opening another delivery center in Cebu in quarter 2. In our product business, we integrated generative AI technologies into bots, TruCap+ and TruBI, and have rolled these features out to all existing customers. Furthermore, these products were listed on the Microsoft Marketplace in quarter 3, and we have sold over 1 million odd dollars of licenses on this platform. Regarding our recent acquisition of Dextara, a summit-level partner for implementing Salesforce, I would like to inform you that the integration is progressing well, and the teams are collaborating actively on new opportunities. We have submitted 10 new proposals in quarter 1. This quarter, we expanded our client portfolio by adding 9 new customers, including a Fortune 500 company. Transport and logistics is a focus vertical for Datamatics across all our lines of businesses. We have 15+ customers in this segment. In quarter 1, we added another U.S. logistics customer to this list. We have aligned our organization structures and processes for higher growth going forward. As I mentioned in the last call, we are excited about the opportunities that artificial intelligence presents. Recently, we became one of the first digital technology companies worldwide to receive an ISO 42001:2023 certification for AI management systems. This achievement will help our customers manage the risks and opportunities associated with AI, balancing innovation with governance. We have recently received a patent for AI in TruCap+. This further solidifies its position as a leading intelligent document processing solution. Microsoft, along with OpenAI, is leading the charter in the AI in the enterprise today. Along with Microsoft, we are co-creating and reimagining applications using the power of AI. One notable development is a partner onboarding Copilot developed by Datamatics, which is amongst the top 3 Copilots featured at Microsoft Build Annual Developer Conference in Seattle, Washington. Additionally, Microsoft recognized Datamatics as an AI first mover in their recent publication, highlighting the recognition of our AI solutions are receiving from the industry. I am excited to announce the groundbreaking AI initiative that our team has successfully secured a leading American supermarket chain. This project entails the implementation of advanced AI-driven video monitoring and analytics technology across 250 locations aimed at enhancing customers' experience while simultaneously mitigating instances of fraud. To date, Datamatics has delivered over 40 AI projects across various verticals. Looking ahead, we are positive about regaining our momentum with anticipated improvement in both revenue growth and profit margins. Regarding our EBIT margins, through diligent cost management and operational efficiencies, we project an EBIT improvement of 150-200 basis points in quarter 2. Before handing over the call to our CFO, Sandeep Mantri, I would like to express my heartfelt gratitude to Sandeep Mantri on his last earnings call with us. His dedication, leadership, and financial acumen have been instrumental in guiding our company in achieving significant milestones. Sandeep, your contributions have laid a solid foundation for our future success, and we are deeply grateful for your commitment and hard work. On behalf of the entire Datamatics team, I wish you all the best in your future endeavors and look forward to your continued success. Thank you for everything. Sandeep, over to you. Thank you, Rahul, for the kind words. Welcome everyone, and thank you for joining us in quarter 1 FY 2025 earning call. Let me start with the financial performance for the Q1 of FY 2025. Our revenue for this quarter stood at INR 394 crores. It is a drop of 4.5% on a sequential basis and a marginal of 0.7% on a YOY basis. Our EBITDA for this quarter was at 13% compared to 17.3% in Q1 of last year. There is a significant drop in EBITDA. Our EBIT for this quarter was at 10.8% compared to 15% in Q1 of last year. As explained by Rahul, the reason for drop in operational profit is primarily due to slow revenue growth increment for 2024/2025 affected in Q1 and our continued investment in AI projects. Our tax rate for the quarter is 17.2% compared to 18.7% in Q1 of last year. Our EPS for the quarter was INR 7.37 per share, compared to INR 8.9 in Q4 and INR 9.35 in last year Q1. When we see segment-wise revenue performance, our digital operation revenue was at INR 164.8 crores, which is a drop of 1.3% on YOY basis. Digital operation EBIT margin was at 15.5%. Total contribution in revenue was 42%. Our digital experience revenue was at INR 67.9 crores, which is a growth of 2.4% on YOY basis. Its EBIT margin was at 14.2%, and its contribution to total revenue was 17%. Our digital technologies revenue was at INR 161.3 crores, which is a growth of 2.2% on YOY basis. EBIT margin for digital technology stood at 4.6%, and the contribution of digital technology to total revenue was 41%. We continue to maintain a healthy balance sheet. As on June 30, 2024, our total cash and investment stood at INR INR 589 crores, and our DSO as at the end of this quarter, was at 61 days. In terms of geographical footprint, U.S. remains our largest geography with 54% of our business coming from U.S., followed by U.K. and Europe at 13%, and the rest of world, including India, is at 33%. In terms of industry footprint, technology and consulting remains the largest segment for us, which constitute 27% of our revenue, followed by BFSI, which stood at 25%, then education and publishing and manufacturing, infra, and logistics, each at 12%. Then non-profit or non-government organization at 10%, retail at 9% of our business. Other, rest, miscellaneous is 5% of our total revenue. Our client concentration remains very healthy with top five, 10, and 20 clients contributing to 23%, 37%, and 50% respectively. As this is my last earnings call with Datamatics, I want to take a moment to express my gratitude. It has been an honor to serve you as your CFO and to work alongside such a talented and dedicated team. I want to thank our employees for their unwavering commitment, our investors for their trust and support, and the entire leadership team for their collaboration and guidance. Together, we have achieved many significant milestones. I am confident that Datamatics is well-positioned for continued success, and I look forward to seeing the company's future accomplishments. Special thanks to Rahul, for always believing in me and trusting me. Thank you all for the incredible journey. With this, I will now pass on the call to operator to open the floor for questions. Thank you. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question should press star and one on their touch-tone telephone. If you wish to 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. Good evening to the management team. Just wanted to understand the softness in growth a little better. As evidently, we could see some pain in the top five and the top 10 accounts. If you could tell us how the trajectory is going to be for the rest of the year with the key accounts and where is the growth going to come from your own, and what is the guidance for the entire year? Sure. On the digital operations side, there was some delay in the shrinkage in the volume. We expect some of that volume to come back in Q2 and Q3 of this year. On the technology side, certain projects got a little pushed out, and again, we expect that to happen in Q3. Overall, from a growth point of view, in the last earnings call, we talked about a 4% organic growth and another 3.5%-4% from our inorganic. We at this point maintain that projection. I think we should be in that range once we grow back some of the volumes and some of the deferred projects kick in. Hello? Okay. Yeah. I get that. Okay. How has Dextara grown for this quarter year-on-year basis, and what is the outlook for Dextara? Dextara is flat. Dextara this quarter has not grown. That does not concern me because our strategy behind Dextara was we had a call for Dextara specifically when we acquired them. They, as a company, because they were much smaller, were bidding for smaller deals, ranging between 50K to 100K. The deals that Datamatics was getting was ranging between half a million to up to $3 million per deal. Our strategy behind that was with their competence and expertise, we will convert a few of the larger deals that we are getting, and that will give the upside in terms of growth. In quarter 1, it's very difficult to close a deal so fast. I mean, that's too short a period. They have been working very closely with our team and as I mentioned, we've submitted 10 proposals in Q1 of this year. I'm still very positive about their ability to close a few, one or two large deals, and that will get the growth rate going for Dextara. You paused the small deal growth that Dextara was traditionally doing. We've not paused it, but quarter 1 is a little soft. They have been working on several deals. We've not paused the small deals, but the upside will come when you sign one or two large deals, and we have that pipeline from Datamatics. Okay. Have we disclosed the total pipeline this quarter? What does it stand at? No, our pipeline last quarter was about $200 million. We have seen the softness, so that has come down to about 170-ish. Okay. How much of these increments that we have rolled out in quarter 1 will continue in quarter 2 and ongoing investments? Can you give me some margin outlook for the entire year? Yeah. The increments that we gave on an average is roughly about 9%-9.5%. Obviously, when you give that increment, it stays through the whole year. It goes up and down a little bit depending on churn. Some people leave, some new people come, but roughly 9.5% will stay through the whole year. All services companies, IT companies, go through those motions when they tighten their belt, they churn some staff, and then it sort of comes back to normal. Sure. Yeah. I mean, if Q2 is going to see the margin recovery, do you see that trend of recovery continuing to the subsequent quarters or what's the sense? Yeah, the subsequent quarter should see the trend continuing. The reason is that, as I mentioned, some of the volume that came down in digital operations will kick in in quarter 2 and quarter 3. Also some of the projects in the IT which got pushed out to quarter 3. So they will kick in, and the moment you get the revenues coming in, the margins by default improve because the cost structure does not move. Q4 for us always tends to spike a little bit. So Q4 will always be healthier than the other three quarters. So quarter 2, 3, and 4 should be better than quarter 1. Okay. There is an exceptional item of 3 crores in the P&L. Yeah, that's correct. Sir, that is the amount we paid toward acquisition of Dextara to the advisor who helped us in getting this deal. Okay. That is the exception and not sitting in the operational cost. That is not operational. Yeah, that is a one-time cost. Yeah. Okay. Fine. Thank you and good luck. Thank you. Thank you. Thank you. The next question is from the line of Nikhil from Kizuna Capital. Please go ahead. Yes, sir. Thank you for giving me the opportunity. Sir, I just wanted to ask you, the organic that we had, can you quantify them in terms of what falls due to softness in demand, increments and investment in AI? We don't have that breakup now. You're saying, what is the impact of increments, the impact of AI and the impact of the softness. The breakup of that. Is that correct? Yes. Yeah, I don't have that handy as of. Increment will be having about 9.5%, which means about 4.5%. Almost increment is one of the major reasons, and coupled with the sluggish revenue growth, both have actually brought down the EBITDA or EBIT. If the revenue growth would have been on the high Then we would have Then the waterline would have been much Even with 6%-7% revenue growth, we would have better in terms of profitability. Okay, sir. Sir, any earn-outs triggered during this Dextara acquisition? There was a performance-based payout that was going to be triggered. That will happen at the end of the year. First payment will be at the end of the year, and second payment will be in 31st March 2026. This is a 2-year deal post acquisition. Okay, sir. In terms of pipeline of $117 million. Sir, can you bifurcate them into the vertical side, how much in the AFC, how much in the product side? In which vertical, like BFSI, manufacturing? Yeah, I don't have that breakup right now, but we- We don't give segment-wise bifurcation of pipeline. In fact, we started giving pipeline last quarter only. So right now we are not giving segment-wise what is the pipeline. Because many of the places, what is happening, some are combined deals. So it is very difficult to figure out which segment it is. Hybrid deals, basically. We are seeing more and more hybrid deals. Okay, sir. That's it from my side. Thank you, sir. Thank you. 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 Ankur, an individual investor. Please go ahead. Hi, good evening, Rahul and Sandeep. As an individual investor, when I see the presentation, I feel that predominantly the personal cost has increased in the first quarter in a region. So, do I understand that this phenomenon will happen every year and the quarter one will show the impact every year like this? And second thing is, what is- Your voice is very unclear. Is it more clear now? Not really. It's a little louder, but not necessarily clearer. But maybe you can just continue and if we can understand, we can understand. Okay. My question is that, the personal cost phenomena is not a new phenomena. It will be there in every quarter. Correct. Every year it would be there. If we are targeting the revenue growth, what are the new verticals and markets we are scouting for? The second question which I just want to understand is, the AI and technology is quite a thing which is dependent upon R&D, and there has been huge inflow in different R&D organizations across the world. How we are keeping pace to be ahead of all these technological advancements? These are the three questions that I want answered. To your first question. That is not a new phenomena. However, the growth particularly was sluggish and when you have growth, it absorbs the increase in cost very easily. Unfortunately, because we didn't have the growth in Q1 of this year, the cost absorption was not at the same level. I am confident that as we go through the quarters, the growth will come in, and we should be able to absorb the cost. Having said that, we've already tightened our belt, and we are already seeing results of that tightening of the belt in the first month of Q2, which is July. To your point about AI and how we are keeping abreast. We are very plugged in with the R&D team that we have. We have a whole team under DataLabs that does a lot of R&D in this space. We are working very closely with Microsoft and with Google. We are actually building cutting-edge technology, basis which Microsoft has covered us in their coffee table book as an early adopter of AI. Also, they showcased Datamatics in their head office in Seattle, Washington, as one of three companies globally from an AI ISV point of view. We also got the ISO 42001:2023 certification for AI. All of these things that we are doing, and also I talked about a very interesting project around video analytics that we got, which is a project that we signed up and we will roll it out across 250 locations. This is all, I think, testimony to the kind of work we've done on AI. The R&D team, I must say, has done some very cutting-edge stuff. We will start seeing the benefits of all of this that we've done in the coming quarters. Thank you, Rahul, for this. I extend my warm wishes to Sandeep also for his new endeavor. We have seen the company, I have been tracking it from last one and a half year and it has been phenomenal to see good leaders in the industry. Thank you. Thank you both. Thank you. Thank you. A reminder to all participants that you may press star and one to ask a question. Ladies and gentlemen, if you wish to ask a question, you may press star and one. The next question is from the line of Nikhil from Kizuna Capital. Please go ahead. Yes, sir. I just wanted to ask you about the AFC pipeline. How are we approaching the AFC deals? Like those are the large deals that we talked last time. Yeah. On AFC, we have just kicked off line 2B. Line 2B was delayed for a variety of reasons, with COVID and all that type of stuff. But we just kicked it off. We have currently a bid for Pune Metro and we are awaiting the results of Pune Metro. I am confident that within the next one month we will get the results for sure. So in Q2, we will get some visibility to where we are on Pune Metro. We are looking at some other lines that are coming in in Mumbai, line 9, line 4, 5 and 6. As we go through the motions, we will give an update on that as well. Plus, in addition to that, we are pivoting a little bit more into the U.S. So our sales team has now started focusing very actively on the U.S. market in this space. Okay, sir. Thank you, sir. Thank you. Thank you. A reminder to all participants that you may press star and one to ask a question. The next question is on the line of Pallavi Deshpande from Sameeksha Capital. Please go ahead. Sir, you mentioned about Mumbai line 9, 4, 5 and 6. When does that come up? In terms of the U.S. that you're pivoting into, is this the first time we will be looking for contracts on this end? No, in the U.S., we have done Memphis as a project. We have done a small project with San Diego. Now we've got a sales team in the U.S. that is looking at many other opportunities in the U.S. So we've done U.S. projects before and I'm very confident we'll be able to deliver on those. As far as line 9, 4, 5 and 6, the tenders have been floated. We will now be working on those tenders and we will probably submit some of them in the next 2 months. Probably a quarter after that. So really you're talking about Q3, where we start seeing some results as to which ones materialize. Right. The profitability for this in India versus the U.S., how would it be different? Yeah. That is a concern. India is a far more price sensitive market and profitability is lower. That's the reason why we are focusing more on the U.S. We've also hired a global head of sales in the U.S. We're looking at the AFC business in the U.S. as well. So increasingly we are focusing more on the Western markets. Europe is right now a little sluggish because of the Ukraine war, the inflation and things like that. There is a problem in Europe. The U.S. is still looking good. There is some degree of uncertainty because of the elections coming up. We don't know which way it's going to go. Outside of that, the economy seems to be doing quite all right. There is slowness which we see more in terms of decisions being deferred, and that's the softness that we've seen and projects are getting pushed out. But on a little longer term, six months to a year and a half, I don't see too much of a trouble with the U.S. market. Lastly, any other plans on the boards on acquisition side? We are in dialogue with some companies. Nothing that is at the serious level that I would like to announce right now. But as those mature, we will certainly go through the motions of having a board approval, informing SEBI, and things like that. We are in dialogue with some companies, but nothing right now that needs to be announced. Right, sir. Thank you so much. Thank you. Thank you. 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 Nikhil from Kizuna Capital. Please go ahead. Yes, sir. According to my understanding, our next margin levers are going to be the revenue growth and revenue growth only. Right, sir? Sorry, say that again, please. Sir, our next margin lever that is going to go to the bottom line is going to be the revenue growth. That's correct. Not only revenue growth, we are tightening our belt also. So that also will give some sort of margin improvement. Some cost control and revenue growth combination. It is a combination. Sir, if you want to guide, what will be the exit margin for 2025? For the full year? Yes, sir. Right now we are guiding only Q2 for margin, which will be about 150-200 basis points. If you look at the current one, we are talking about 10.8% as an EBIT level. If we improve 2 basis point, 1 basis point, you are talking about 12.8. 12.5-12.8, right. I think we will maintain 12%-13% range. Yeah. For the year. Okay, sir. Thank you, sir. Thank you. As there are no further questions from the participants, I would now like to hand the conference over to the management for their closing comments. Thank you everyone for being on the call today. It is a pleasure talking to you, and I look forward to speaking to you again at the end of quarter 2. I am sure we will have better results to talk about and we should be back with the growth momentum. Thank you once again for being on the call. Bye-bye. On behalf of Datamatics Global Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.