CL Educate Limited (CLEDUCATE) Earnings Call Transcript

Thank you for your patience, and good afternoon, once again, ladies and gentlemen, and welcome to CL Educate Limited Q1 FY '27 Analyst Call. My name is Arjun Wadhwa. I'm the group CFO of CL Educate, and I'll be your host today. Welcome once again to our Metaverse platform called Vosmos, now in its fourth year for our analyst calls. This call, as always, will be recorded, transcribed and made available in the investors 1 on our website within the next 24 to 48 hours. [Operator Instructions]. Joining me on this conference call today are Mr. | Satya Narayanan, the Founder and Chairman of CL Educate, Mr. Gautam Puri, Co-Founder, Vice Chairman and Managing Director; Gautham takes the direct reporting of the tech businesses, including our test prep business; Mr. Nikhil Mahajan, Executive Director and Group CEO of our enterprise businesses. Nikhil anchors, the martech business specifically. Mr. Jatin, he is the Chairman of Nexa Global Limited and an independent director on the Board of CL Educate. Yatrik, sir is also the Chairman of our group strategic and internal body created nearly a year ago to provide strategic financial oversight input and guidance on various governance and financial matters across the group, with an aim towards long-term value creation. I would now like to hand over to Satya to say a few words, after which Nikhil will run you through the presentation. Satya, sir, over to you.

Thanks, Arjun. I hope I'm audible.

Yes, loud and clear.

Good afternoon, everybody. I'll just take a couple of minutes to articulate 2 most important perhaps topics, which are very loudly occupying our space -- it has implications for us, both positive and negative. Hence, I thought I'll spend a couple of minutes on this. Number 1 is the entire meat led various controversies actions that you have seen over the last 45 to 60 days, which has led to the decisive step of very strong policy intervention from the honorable prime minister wiith Nandan Nilekani head task force created which is going to look at broad examination reforms may not be brought educational reforms but definitely broad examination reforms based on the mandate. And here are some readings, if you will, that we hold for the next 12 to 24 months. Number one is the entire exam or assessment ecosystem will go more and more digital and in a far more accelerated pace. So the first point is the direction of assessments is going to be digital, number one. Number two, from an examinations point of view, there is going to be a significant amount of rationalization of exam, which is likely to happen. Now all of these are our readings. We don't have an inside view of what will come out. But as players in the market as opinion leaders as set us need to be in step with it. So these are our views. And just to give you 1 or 2 illustrations for you to understand about 1.5 decades ago, there were as many engineering entrance exams as a number of states in the country. There was was JEE, there was AIEEE, EAMCET by Andhra, UPCET by by UP, MHCET by aharashtra, et cetera. They all got rationalized into becoming 1 exam called IIT-JEE means. Similarly, medical entrance examinations, they all converged into NEET, okay? While some of those have gone well, some of this has not gone well, but the direction is rationalization of exams where a lot of examples will get merged and most exams will go digital. And in the beginning, it could be a CBT, which is a computer-based test, static 1 and multiple slots to derisk the leakage problem with normalization signs coming in for the -- checking the robustness of the assessments. So that's the direction it will go, much later with the computer adaptive test will come into India. That's point number two. Point number 3 is as a result of which the both the assessment companies as well as the test prep companies will have to be alert. There will be newer opportunities that will come. At the same time, there could be some opportunities or some examples that are happening currently that might go our way. Overall, the size of the market, overall, the number of assessment takers, they all will increase, but what will merge, what new opportunity will emerge is something that you would know only over the next few quarters. And the last point arising out of this is that there is a likelihood of consolidation playing out both on the assessment side as well as the test prep side over the next couple of years. That's on the left-hand side. On the right-hand side, we are also closely following, I'm sure the AI the proliferation of it, the opportunities coming out of it, and we are very deeply embedded in that. We are actively using it, what it is doing for those of us who are very proactive is that the speed of innovation has collapsed what you could earlier do over a 6- to 12-month period, perhaps you can do it now in a 4- to 6-week period. What that has done is that with the same bandwidth, there is a whole lot of concurrent projects which are -- which would otherwise have been in the long priority funnel our pipeline, more than 1, more than 2, are becoming concurrent projects without investing more in your people bandwidth on the technology side. tentatively speaking, and we are measuring it very, very digitally actively every month and every quarter, almost 74% of our coding now is AI-enabled driven. And as you move in and see, we have done a lot of cost rationalizations. So while the revenue growth is a bit of a challenge in a couple of places, what it has helped us is that we could rationalize costs and contribute significantly from the technology and AI pieces without necessarily sacrificing on the ideas that could get that growth from the next 6 quarters. So those were the 2 broad commentaries I thought I will make at the overall context, I'll pause here, hand it over to Nikhil to get into the business part. Thank you.

Thanks, Satya, and welcome to all of you. I hope I'm clearly audible. Okay. So let me give you a brief overview of the overall picture of the quarter, which has just gone by. As Satya said, while the revenue has been a little bit of a challenge, a slight abnormality, we, because of operational optimization as well as the cost optimization, we were able to drive in EBITDA, which is marginally higher than the first quarter of last year and is significantly higher than quarter-on-quarter from the fourth quarter. This translates into roughly a 28 basis point increase in our EBITDA margin to about 16.6%. However, despite a modest increase in the overall absolute EBITDA because of the interest and the depreciation charge, we are after the -- after-tax profitability level, we are still a negative. But quarter 1 is usually our leanest and the weakest quarter for our DEX-IT digital assessment as well as the Martech business. And as we roll into Q2 and Q3, I think there will be a significant bit of change in almost all the parameters as we roll out the Q2 and Q3 outcomes. -- couple of critical things which I would want to highlight is that on a full quarter basis, there has been a decline in revenue of about INR 17.5 crores, which was compensated by about cost optimization, operational optimization, which basically consists of 2 parts: service delivery cost rationalization of about INR 9.3 crores and fixed overhead cost rationalization of about INR 8.7 crores. So while service delivery cost was direct linkage to a slight decline of revenue or some deferment of certain project-related executions from quarter 1 to quarter 2. I think the critical parameter for all of you to note is that our overhead costs have gone down by about INR 8.7 crores this quarter as compared to quarter 1 of last year. I would also wish to reiterate that the cost optimization, which was kick started by us in Q3 of last year, broadly panned out over 6 months. So the overall full year cost utilization will continue to reflect in the numbers over their previous 12 months, previous quarters in both Q2 and Q3 towards the end of the year before they begin to taper off -- the finance cost has also declined with the interest cost declining by about INR 12.8 crores to about INR 10.6 crores depreciation. But the depreciation and amortization expenses have increased by about 28% from INR 11.2 crores because of certain addition of fixed assets to that towards the end of quarter 4, wherein the depreciation charge hit in Q4 to the fullest extent. So the critical other aspects, which I would want at a very high level, what to bring out is that in the DEX business, we have won about 9 new contracts with a total contract value of about INR 34 crores during the course of the first quarter, of which around INR 22 crores will get executed during the current year and the balance will be executed in the year after that as some of these contracts are multiyear contracts. The Martech revenue has increased by about 7%, which has translated into an EBITDA increase of about 35% over the same quarter previous year. We continue to add and sign up reasonably blue chip, newer blue chip customers in Singapore and Indonesia. On that tech side, I think one important aspect is that the easy apply adoption has gone wider and deeper. And especially in the MDS segment now, except IIM, most of the well-known management institutes as well as the examinations are now on board our EasyApply platform. The test prep headwinds continue to prevail though we see the churn which was happening in the industry now stabilizing a bit. There are certain green shoots, which are emerging in certain product segments. But one of the largest segment vertical for us, MBA is going through a significant market churn, and I will delve deeper into it as we go along. As I had stated earlier, Q1 is seasonally our lightest quarter for both MarTech as well as digital assessments business. And for both these businesses, Q2 are the heaviest business in terms of delivery, enhanced revenue and profitability. I think I've already covered this basically the EBITDA bridge on reduction of service delivery expenses and the cost over a nation. Now let me give a slightly deeper depth into our vertical-wise business, the L&D business in our tech space has seen a revenue decline of about 15%, a largest jump of which has come from the test per business as stated. EBITDA is slightly down at an operating level by about 30%. On the digital assessment side, our revenue has as compared to the quarter 1 of last year is down by about 17% and EBITDA is down by about 4.3%. However, I think that is not something to be too critically worried about because this was driven by 2 critical paramount. Last year in quarter 1, there were certain rollover exams, which were earlier supposed to have happened in Q4 of '25, did not take place in Q4 and got delivered in Q1. This was to the tune of about INR 6 crores. Usually, that -- those examples, usually get a get executed in Q4 of the fiscal year. And other part is that there is a INR 4.7 crore revenue, which has not yet been recognized or is pending finalization because there has been a certain delay in terms of the depletion of the results from the customer side. So I think going forward, at least that this INR 4.7 crore issue is going to get resolved in uptime in Q2. And the normal business contracts, which we have already signed to bring the overall revenue for Q2 in line with what we have planned as well as in line with what was achieved last year. Market revenue, as we, as I said, had increased by about 3.8% and then EBITDA has increased by about 32%. As stated earlier, this is usually the leanest quarter because of marketing budgets usually start getting released only from the second from May or June onwards. And most corporates bring in the large events from July to December -- mid-December before the group closed down for Christmas. So I think Q2 and Q3, are the areas, and we have a very reasonable robust pipeline for this business as we go forward. In the test strip side, as stated, we saw a slight -- we saw a revenue decline of about 15% from INR 53 crores last year to about INR 45 crores. EBITDA was slightly lower by 13%, but it also still saw an EBITDA margin expansion by about 60 basis points. As Satya has also articulated, the test strip is going and facing a couple of challenges. One is that the structural readjustment in this sector is continuing to take place as well as which is being aided by much faster acceleration in deployment of AI technology and availability of free online learning and training resources. Another key aspect is our revenue mix also saw a certain realignment with our franchise revenue beginning to contributing a slightly higher percentage versus our own sector operations, which also enabled a push on the average realization. However, the decline in volumes because of the market churn wasn't adequately compensated by the price increase. EasyApply has scaled up pretty well and has continued to scale up as we get into the peak new admission season I don't know if you recall last year, we had seen a 5x growth in our application to the EasyApply platform, which the previous year's admission cycle is just about ending the New Year's admission cycle has just got activated, and the first 15 days, I think we have seen an extremely positive traction, and we are extremely bullish and positive about the scale-up of this line over the next 12 months. Q1, again, is a slow quarter for our platform monetization business because most institutions are busy in terms of closing their previous years, admission cycles and processes. The academic sessions usually kick off in the first week of August, and that's when their next year's admission processes begin to take off and kick in. Arjun, can we move to the next slide? I think I've covered most of it at a macro overview level, the decline in revenue in the quarter 1, which was predominantly driven by examination rollover, which happened in the previous year, which added INR 6 crores in Q1 of '26 and a deferred revenue of about INR 4.7 crores during the current quarter. We have been able to keep the overall overhead costs in control, which has pushed up our margin by about 338 basis -- 340 basis points. And as the business scales up, depending upon the mix between the core business and the gateway business, there might be some movements on the EBITDA margin, but we will definitely continue to expand our EBITDA margin as compared to last year on a quarter-to-quarter basis. Arjun, I can move to the next slide. On the MarTech side, again, I've broadly given you an outlook on the numbers. The business are driven by expansion on EBITDA with even a modest revenue growth of INR 7 crore on a leaner quarter, our EBITDA margin showed an expansion of about 180 basis points. The Q2 is the biggest season in our event execution and the business activation calendar with some of our largest events most of the marquee brands lined up for execution in September in India, Singapore and U.S. And we have a reasonably robust pipeline for Q2 as well as Q3, and we are extremely positive about the direction of this business. The contribution of the technology business, which was roughly around 10% last year in the overall revenue. We are expecting that to clip up to roughly around 13% to 15% during the current year, and that will also lead to a margin expansion during the current fiscal year. I think both VOSMOS and VIRSA have found a great adoption and traction, VIRSA, our AI-driven agetech tool for an account-based marketing approach has found Already, we have essay completed pilots and now scaling it up for corporates like Salesforce, Dell, Infosys. Infosys is now scaling it up. They started with Indian market, and they are about scaling it up for APAC and the U.S. market. And that, I think, if a brand like Infosys and sales force have come or more over the last 6 months. We are now aggressively beginning to look for partners and trust accelerator for a much more accelerated growth in Q2 and Q3. Arjun, I think this was the last slide, but before I close, I also wanted to give an update at corporate action -- as you were aware, we had filed with NCLT Bombay for the capital reduction scheme for the RPS, which was transferred to us as a part of the tax acquisition happy to share that the NCLT approval came in the second week of July. The necessary ROC approvals have also been received, and we are hopeful that we should be able to wind up that transaction and complete the redemption of those [ refreshes ] within the month of August. That would enable optimization and desizing of my balance sheet to a more optimal and a true reflection of the balance sheet size. And also take away some of the legacy loading, which continue to play our balance sheet as a part of the transaction. So hopefully, by end of August, those would be done in dusted. I think with that, I come to the end of my presentation, and we are now happy to take questions.

Thank you so much, Nikhil. There are a couple of questions already waiting for us. And both of them are on the policy side. So Satya, maybe I'll throw them to you. Number 1 is, how is the rationalization of exams likely to impact our business. And can you share a little bit about the growth outlook for DEX in the near and medium term. is also from the same person, Rahul Bhansali has also asked with so much public scrutiny and focus on the conduct of exams, how do we counter the risk that the NTA agency might develop in-house software and hardware to mitigate risk malpractice.

Okay. Arjun, maybe now perhaps speak and stop sharing, so the PPT share.

Yes, sure.

Okay. So on the exam rationalization part, the multiplicity of exams in India, both at the undergrad and the postgrad levels are actually far too many. And many of those are likely to get integrated. For instance, for design, fashion, architecture, BBA, the commerce, all of those. So there is a spool of thought that the common exam, which might be more like SAP at the UG level or a GMAT at the PG level or a GRE. So it can come down to 3 to 4 examples, which actually has already happened as far as the engineering, medical is concerned, like I mentioned in the beginning, okay? Now what does it do to any player -- is that the -- some parts of it will morph into another exam. Some new opportunities will come. So those who will go and grab that new opportunity, we'll be able to benefit a lot from it. The more and more movement is likely towards aptitude competitive skills, be agnostic, which are geography agnostic. So I think that's the broad direction it will take, okay? But it is too premature for us to saying anything more than that, whether it happens in 12 months or 24 months, if 3 steps are taken in one go. I think those things are better watched and studied carefully than jumping the gap. That's where I would pause. The good thing is that the enrollments into higher education from here where it is, it has to grow by about [ $0.10 ] over the next 9 years. So the addressable market is going to become large. That's the reason why a lot of these things are likely to happen so that from a student's benefit point of view, the exams will be on demand any number of times and digital. So that be cheating the mall cactuses, et cetera, are all going to be minimized. For example, you would have heard too much of it when it comes to UPC or an IoT or a cat. So it's a lot about both technology and also the management of that examination. On the scrutiny part, internally, we look at it as a good opportunity because today is harder scrutiny were to be applied both on the assessment side, especially on the assessment side, not more than a couple of companies, including DEX-IT will figure with the kind of robust technology, security AI-enabled procuring live real-time remote proctoring of all the centers, which are controlled from a control room. These are the things very few players will cross be threshold. So we say that it's a good opportunity. If you're a good brand, a trustworthy player who can not only do quality service, but also can scale up. okay? But at that stage, I'll pause and also request Yatrik sir to come in and make a point or 2 specifically about the DEX's opportunity in this context. Yatrik?

Yes. Yes. So thanks, Satya. And just wanted to supplement what Satya very well articulated is the entire assessment business or the DEX business, moving forward from here to next 3 to 5 years, 2 or 3 contents are very important. One is today the robust technology. And when we think of technology as required in the assessment space, more particularly with the kind of experiences very recent months that India has actually had is we need to actually have a very robust and very, very full proof the proctoring system. And the way DEX-IT technology today is, we are confident that it meets not only today's requirement, but it's very futuristic ingredient has been put into this remote proctoring element of our assessment. Having said that, when we slightly look at how do we scale up this debt business in next 2 to 3 years, One is, obviously, our technology needs complete, complete robustness. We need to rewrite part of the technology and members may kindly recall that when we had the earnings call ended March, sometime in the middle of May, I had alluded there a lot of technology projects, which are underway in terms of its rollout and implementation. And I'm happy to say that almost 60%, 70% of the projects that, as a team, for FY '26, '27 that we had undertaken are almost complete. And the entire examination engine to the way we organize our cyber and IT security to the way we organize our entire network layer to expanding the nodes across the country after 1 very high-level strategic met projects that we are undertaking in the current financial year. The second important aspect for entire DEX business or in general, the education business, is how do we actually demogratize the entire education pan India or Pan globe. So our aspirations obviously do not end with India, but we have global aspirations also and one important ingredient that we have actually rolled out is BYOD, which is Bring Your Own Device. And moment that BYOD becomes a successful tool right, in the hands of both DEX-IT and the hands of the universities, colleges, schools and the candidate, then it's anywhere, anytime, any exams at the choice of the student and it could be online real-time pan Globe. So this is the way if we democratize the entire assessment and education piece, then I think it will be a very important revenue lever...

I'm sorry, I believe Yatrik has dropped out of the call for some reason for a second. We're just trying to get him back at. Yatrik sir. the last word you said was refer that was audible. Yes. Okay.

So the third important lever and as Nikhil mentioned, that Q1 has been a mixed bag. But if you carefully notice that while some of the business or especially 1 business has its own headwinds in terms of Q1 revenues and the profits. The good and the encouraging pieces as a team we have ensured that our costs remains completely and tightly controlled. And therefore, in all the businesses, we are actually closing the quarter with positive EBITDA, even the 1 which had significant headwinds Also, the market and the Dex business operates at 25% to 30% of EBITDA margin, which itself is a very, very encouraging sign. And as Nikhil explained that there is cyclicality in all the businesses. Q2, Q3 would look encouraging for MarTech and DEX business for sure, and that would actually co-op and bring online both the revenue growth and the profit growth. So when we look at the year as a whole and when we look at next 2 years or 3 years, we are very confident as team that we will be able to deliver very robust financial and business growth, and you would have expanded to multiple areas in multiple geographies for sure.

Thank you, Yatrik, sir. I'll next take the question from Aditya Deora where he's asked for an explanation on the difference between the EBIT that is the segment results and the EBITDA that we have shown in our presentation with specific reference to DEX. Aditya, in DEX, other income in Q1 of last year was about INR 3 crores. It's about INR 4.5 crores this year. And of course, as you are aware, the depreciation last year in the first quarter was about INR 2.3 crores versus about INR 3.5 crores this year, which is why you see the difference in the numbers in terms of the segment results versus the EBITDA that is used versus the EBIT that is used in the results that are published versus our presentation. I'll now move on to a quick question on the test prep business, Gautam, maybe I can throw this to you. How is the BBA and IPM business doing specifically this year? And what is the impact of brands like Physics Wallah who have done a lot of pilot work in AI in terms of content creation, impacting the DEX prep business, specifically. This question is from Emil Bagadia.

First of all, BBI PM, the segment is doing fairly well. It has been the growth segment for us, and we expect this to grow further. -- given that a larger number of institutes have started offering 5-year MBA kind of program and a large number of MBA, if they are not all thing, I am if they are not offering a 5-year NPA have started looking at a 4-year program also. So this will be a growth segment. And then if you look at the previous quarter also, this number has only grown, and we expect it to go further. Regarding the use of AI, we are already using AI for content generation. It has been a part for us, not -- I'll say maybe about 1.5 years or 2 years. So it has been a regular part of our business. There's nothing -- it's not a new item for us as such. Okay. Now impact of Physics Wallah from our point of view not in terms of content. I'm sure everyone today is using AI for content translation. The key thing is what is the quality of content you are getting? And how is it being accepted in the market? And that's where we -- I think we are doing fairly well. Secondly, Physics Wallah by nature from a business perspective, has been targeting at the lower end of the market. And while we think pro the lower end also, -- the average has been on the middle and the upper end of the segment. Arjun, over to you.

Thank you, GP. Yatrik sir, if I may throw another question your way, Emil has also inquired about our tax business in terms of how we are using proctoring and specifically AI in proctoring development going forward? And does DEX have a suite available to deal with how technology can impact proctoring of exams, especially in the context of what all is happening gently with the NTA and the need fiasco?

Quick summarization is even before NEET could happen, moment you talk about computer-based exams. CBT, as we call it, computer-based testing, the proctoring and remote proctoring both becomes very important elements to it. So as Mr. Satya was alluding, that we have both very robust proctoring were actually on ground when the examinations are getting conducted, which is an element of technology-enabled technology-based proctor at the desk of the chair, who actually takes that particular that examination through of our software and through our network and through our computer. Also at the entry gates and entry points, we have a very tight physical security of frisking and other elements to deal with the proctoring part on the centers. In addition to that, the second and the important layer is, regardless of the robustness of the physical proctoring that we have at the center, we also have centralized monitoring, Knocknot so this knock is 1 at a network layer and other 1 is at a security level, and we have added third layer, which is at the center layer. And there is a group of people who in our headquarters in Mumbai Anderi actually has a very large screen, very similar to how typically a capital market or a stock exchange, we do the surveillance for all the market participants, very similar technology we have developed, which as a top player to our matching engine and every time examination is going on, you can zoom in and zoom out to every center and within a center to every desk. So sitting in Mumbai, we can go and monitor a child who is in Guwahati, if she or he is trying to do something inappropriate. It gets captured by us, not only captured by us, it's get recorded also not only get recorded, we have the authority to go and kill that particular student computer in the activities persist beyond a particular number of seconds. The AI layer that we have added on top of it is has the capacity to capture the iris, the facial movement, even smallest of the sound bite. So if somebody walks into the room or if somebody whispers even that gets captured through our AI engine and the warning signal goes on that particular student desktop. And if the things do not resolve, we just feel that particular student. So there's a very, very sophisticated layer that we have created for our remote proctoring and AI-based structuring, which is very similar to that you can imagine that can happen into a capital market business. And as Satya mentioned, like very few institutions in this country or in the world, has this kind of solution available for the digital assessment piece. Over to you, Arjun.

Thank you so much, Yatrik sir. I'm sure that would have addressed any concerns that the investors had in terms of how we leverage technology with regards to the major exams that we conduct. There are also follow-up questions on the NTA specifically in terms of how the impact of the postponement of several exams, which the NTA was handling previously is likely to impact us specifically even that the Nilekani committee has been set up and the global environmental changes that are happening in the marketplace right now. Yatrik sir or Satya if either of you would like to take this.

Yatrik sir, you want to go?

Yes, okay sure. So I mean thank you for that very important question. And I must summarize or mention that every incident and every context creates both opportunity, opportunity to do something more and better in your business -- it also gives us some opportunity to how you mitigate the risk. So this entire NTA, whatever experience thing has happened it only has further put that much more stress on why the robustness in conducting the exam and the ultimate students interest is at the core of assessment business. And this is what potentially for last more than 2 decades that debt is having in their overall vision segment ultimately, regardless of the revenue regardless of the profit, regardless of who is the client, for us, the end customer and client is the student. And the corridor of the student is most important and dear to us when we are into this particular business. So we have all possible technologies, all personal precaution, all possible skills all possible where we do to ensure that the student interest is protected. So the way I look at it is this entire NEET issue or enter committee that is appointed by Nilekani are the ones which are going to open the doors for next IT as we move forward -- and in near term, these are going to only help us in terms of galvanizing our business. Only thing is yes, it is not that easy a business. It is a risky business. But if you do your things well, if you put your acts in proper shape, I you definitely come out to be a winner. So over to you, Satya if there is anything add to this.