Black Box Limited (500463) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Q1 FY '27 Earnings Conference Call of Black Box Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements do not guarantee the future performance of the company and may involve risks and uncertainties that are difficult to predict. [Operator Instructions] 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.

Good morning, everyone, and thank you for joining us today. On behalf of Black Box Limited, I extend a warm welcome to all of you to our Q1 FY '27 earnings conference call. I'll begin by sharing an overview of our business performance, the evolving industry landscape and the strategic progress we have made during the quarter, after which our CFO, Mr. Deepak Bansal, will take you through the financial highlights in greater detail. A couple of months ago, during our Capital Markets Day, we shared an important milestone in Black Box's journey. We spoke about how the transformation that we embarked upon over the last several years had largely been completed and that the next phase of our journey will be centered around growth, scale and disciplined execution. As I reflect on the first quarter of FY '27, I'm pleased to say that we have made a strong start on both fronts, financially and operationally, reinforcing our confidence in the road ahead. Financially, we have delivered our highest ever quarterly revenue, supported by improved execution of the rising order backlog and the contribution from our recently acquired Brazilian entity 2S. The quarter also saw our order bookings of USD 339 million, taking our order backlog to a record ever of approximately USD 950 million, up 83% year-on-year and providing strong visibility for future growth. Equally important, we made significant operational progress during the quarter, adding a new global hyperscaler in the United States through a USD 131 million, about INR 1,240 crores order while continuing to deepen our relationship with our existing hyperscalers. These wins are a strong validation of the capabilities and scale we have built. I'm proud to say that Black Box is the only India origin digital infrastructure solutions company currently executing gigawatt scale data center programs, demonstrating the scale of capabilities it has built to participate in accelerating global AI infrastructure build-out. To understand in detail why we are increasingly confident about our long-term outlook, it is also useful to step back and look at the broader technology landscape because what we are witnessing today is far bigger than a normal technology cycle. We are in the midst of one of the largest digital infrastructure investment cycles in history. This is not a short-term trend driven by single technology. Rather, it's a structural transformation powered by artificial intelligence, cloud computing, networking, cybersecurity and next-generation digital infrastructure that is expected to reshape industries and economies over the coming decade. Industry estimates continue to move higher. According to Gartner's article published in July, global enterprise technology spending is expected to exceed USD 6.4 trillion, up 14.2% year-on-year, including $822 billion on data center systems alone, a whopping increase of 62.5% year-on-year. At the same time, leading hyperscalers, including Google has increased its budget to USD 190 billion to USD 205 billion for FY '26 in its current earnings release in July, double from last year and so have other large players follow suit. Within this landscape, Black Box participates across nearly USD 250 billion to USD 300 billion of addressable opportunities spanning data centers, enterprise networking, connectivity infrastructure, cybersecurity, managed services, digital workplace solutions. Importantly, the majority of this spending is occurring in markets where we already have strong positions, particularly in the United States, where nearly 60% to 70% of spending is targeted. What makes this investment cycle particularly compelling is the convergence of multiple long-term technology trends. AI workloads are driving unprecedented demand for compute capacity. Enterprise networks are being modernized through high-speed connectivity, edge computing, private 5G, Wi-Fi 7. At the same time, cybersecurity has become increasingly mission critical as organizations strengthen digital resilience. These trends are creating sustained demand across the very capabilities that Black Box has been building over many years. Today, Black Box participates across a sizable addressable market spanning data center, enterprise networking, connected buildings, cybersecurity, managed services and digital workplace solutions. More importantly, a significant portion of this investment is taking place in markets where we already have deep customer relationships, particularly in the United States, where we continue to maintain a strong presence. However, the size of the opportunity alone is not enough. Success in this market increasingly depends on the ability to execute at scale. As hyperscale projects become larger and more complex, customers increasingly prioritize execution capability, scale experience and the ability to mobilize skilled resources quickly across multiple locations. Winning these engagements is no longer simply about offering at the lowest price. It is about demonstrating consistent execution on mission-critical infrastructure. This is precisely where Black Box enjoys a meaningful competitive advantage. Over the past several years, we have deliberately invested in strengthening our execution capabilities, expanding our leadership team and building a global delivery platform that can support large-scale infrastructure programs. We continue to hire and train talent at scale with plans to onboard nearly 2,000 professionals, ensuring that we have the resources required to support our customers' long-term growth plans. These investments create significant barriers to entry and position us favorably as customers increasingly consolidate spending with trusted partners capable of delivering at scale. Equally important is the strength of the customer relationship we have built over the years. We work with leading hyperscalers, Fortune 500 enterprises, financial institutions, health care organizations, manufacturers, global technology companies across more than 35 countries. Over the years, we have built and become deeply embedded within many of the mission-critical environments, and we believe this trust creates significant opportunity to expand wallet share as customers increase investments in AI-led infrastructure. Alongside strengthening customer relationships, we have also continued to improve the quality of our own business. Over the past few quarters, we have consciously rationalized several low-value long-tail customer accounts while increasing our focus on larger strategic enterprise. This approach significantly improves the quality, visibility and profitability of our revenue base over the long term. Our objective is clear: to go deeper with strategic customers rather than simply becoming broader across smaller accounts. The strategy is already translating into encouraging business momentum, particularly in one of our most important growth areas. The momentum in our data center business continues to remain particularly encouraging. We continue to see healthy customer demand across AI campuses, hyperscale infrastructure, enterprise modernization, networking and managed services. Encouragingly, supply chain conditions have also improved over the last quarter, particularly across cables and fiber, supporting faster project execution and a stronger pace of backlog conversion going forward. Taken together, these developments reinforce our confidence in the long-term road map that we have shared during our Capital Markets Day. As we highlighted during our Capital Markets Day, our aspiration is to build Black Box into an INR 18,000 crore or USD 2 billion revenue company by FY '30. Around INR 12,000 crores of this growth is expected to come organically, supported by strong execution, conversion of our robust order backlog, sustained demand for AI-led digital infrastructure, deeper engagements with strategic customers and improved project execution. The balance INR 6,000 crores is expected to come through inorganic growth, leveraging our proven M&A engine, successful integration track record and a healthy acquisition pipeline. The recently completed Brazil acquisition, which adds approximately USD 50 million in annual revenue represents another meaningful step towards this objective. This ambition is supported by 4 growth pillars: hyperscale digital infrastructure, GSI Americas, growth across India and rest of the world markets and evolution of our technology product solutions business towards recurring and platform-led revenues. These pillars are reinforced by our strong execution excellence. Overall, the first quarter has further strengthened our conviction that we are well positioned to execute on this road map. We believe FY '27 is not the beginning of our journey. It is the beginning of the scaling phase of our journey. We enter this year with a stronger business, a healthier balance sheet, expanding customer relationships and multiple long-term growth drivers working in our favor. With that, let me now hand over the call to Deepak, who will take you through the financial performance in greater detail. Thank you.

Thank you, Sanjeev, and good morning, everyone. Sanjeev has shared our strategic progress and the strong industry fundamentals supporting our business and the tailwind what we have right now. Let me now take you through our financial performance for the first quarter, the operational progress we continue to make and our outlook for the year ahead. Over the last 3 years, our focus has been on building a business that can scale profitably and sustainably. Our transformation has centered around 5 priorities: strengthening the balance sheet, improving profitability, disciplined capital allocation, simplifying operations and building a scalable operating model. Today, the quality of our business is fundamentally stronger, providing us with a solid platform to capitalize on the opportunities ahead. A key outcome of this transformation has been the improvement in our customer portfolio. As Sanjeev highlighted, we have transitioned from a fragmented customer base to approximately 300 strategic accounts, including hyperscalers, enabling greater wallet share, stronger revenue visibility and healthier margins. This has significantly improved both the quality and predictability of our revenues while positioning us to execute larger multiyear engagements. Against this backdrop, we have started FY '27 on a particularly strong financial footing. Quarter 1 of FY '27 was one of our strongest quarters as we reported highest ever revenue of INR 1,719 crores, representing a 24% year-on-year growth. EBITDA increased to INR 160 crores, up 38% year-on-year, while profit after tax grew to INR 56 crores, an increase of 18% over the corresponding quarter last year. The quarter also includes 2 months of financial consolidation from our Brazil acquisition 2S. Equally encouraging was the improvement in profitability. EBITDA margin expanded by 90 basis points to 9.3%, reflecting operating leverage, a better business mix, disciplined execution and the benefits of the structural initiatives implemented over the last few years. While we continue to invest in our sales organization, engineering capabilities and delivery teams, operational efficiencies through our global capability center in Bengaluru, AI-led productivity initiatives, centralized delivery, procurement discipline and stronger project controls continue to support margin improvement. Our medium-term objective remains to consistently operate at or above a 10% EBITDA margin while maintaining healthy returns on capital. The healthy demand environment that Sanjeev spoke about also continues to translate into a robust order pipeline. Demand across our core businesses also remains healthy. We continue to see strong customer spending across AI-led digital infrastructure, data centers, enterprise networking, managed services and cybersecurity, giving us confidence in the sustainability of our growth pipeline. From an order book perspective, we continue to witness healthy customer demand. During the quarter, we secured orders worth USD 339 million. Our backlog continues to reflect the progress we have made. Since the beginning of our transformation journey, it has increased by 83% to over USD 950 million at the end of quarter 1 of FY '27 with a growing share of large multiyear and mission-critical infrastructure programs. The tenure of our data center engagements now ranges between 24 and 36 months, providing strong revenue visibility and improving the predictability of our business. While the industry opportunity is significant, our focus remains on converting that opportunity into profitable growth, healthy margins, strong cash generation and long-term shareholder value. Cash flow continues to remain a key management priority. For FY '27, we expect our operating cash flow to EBITDA conversion to improve meaningfully over FY '26, supported by disciplined working capital management. Our capital allocation philosophy also remains unchanged and continues to focus on long-term value creation. We will continue to invest across 3 priorities: strengthening our people and technology capabilities, supporting the working capital requirements of our growing business and pursuing selective acquisitions that enhance our capabilities and geographic reach. The acquisition of 2S reflects this disciplined approach. In addition to strengthening our presence in Brazil, it expands our capabilities across networking, cybersecurity and managed services while providing a strategic platform to participate in the broader Latin American opportunity. As with every acquisition, our focus remains on disciplined integration and realizing long-term synergies. Based on the visibility we have today, we remain confident in our outlook for FY '27. Our guidance for FY '27 is as follows: order backlog, we should end on March 31, 2027 at USD 1.4 billion to USD 1.5 billion, which is a growth of 65% to 75%. Order bookings in the year, we should do between $1.3 billion to $1.4 billion, which is again a growth between 45% to 50%. Revenue, we should do between INR 7,800 crores to INR 8,000 crores, which is a growth of 23% to 27%. EBITDA, we should do between INR 700 crores to INR 725 crores, which is a growth of 27% to 32%. EBITDA margins will range between 9.3% to 9.4%, which is again up by around 30 to 40 basis points. Profit after tax, we are expecting between INR 325 crores to INR 350 crores, a growth of 38% to 50%. Historically, quarter 1 has been a relatively softer quarter for Black Box. We expect stronger revenue conversion and operating leverage in the second half of the fiscal year with this momentum supporting the delivery of the FY '27 guidance outlined in our presentation. Assuming normal execution time lines and no significant customer-led delays, we believe this guidance is achievable. Going forward, we will continue to prioritize profitable growth, disciplined capital allocation, operational excellence and balance sheet strength, supported by a healthy order backlog, improving customer quality and favorable industry tailwinds. We remain confident in our growth outlook. Black Box enters this next phase with a stronger financial foundation, a disciplined operating model and a clear road map towards our aspiration of building a USD 2 billion business by FY '30 while creating a long-term shareholder value. Thank you. And with that, I would now like to hand the call back to the operator to open the floor for questions.

[Operator Instructions] The first question comes from the line of Deep Shah with 360 ONE Capital.

Sanjeev and Deepak, congrats on great set of numbers. A couple of bookkeeping questions first. If you could highlight the organic revenue growth given that 2S was there from 1st of May, that is one. Second, so I appreciate the comment that you made on -- in your opening remarks about cash flow improvement. Now you also explained in the past as to the accelerated investments that we have to make leading to a benign cash flow relative to EBITDA. So if you could give some more color as to maybe a ballpark figure where you expect this to be or the causes why you expect this to improve given the order backlog suggests that we will actually have to make a lot more investments this year? And is that assessment correct? So that's second. Third, if I look at our order backlog and say, for a moment, I exclude projects, which would be longer term in nature, I still see a 38% kind of increase in our order backlog, if I look at managed services, maintenance contracts and products, which is of course very small. So my question here really is that do you think you are being slightly conservative when you guide on '27 numbers? Or is it that you're expecting a lot of growth to maybe start in 3Q and 4Q and which is why the numbers will flow in '28? These are my questions.

Okay. So I will start taking one by one. So the organic revenue. So out of the total INR 1,719 crores of revenue we have done for this year, the inorganic, which is that 2S has contributed around INR 60 crores of revenue. So all the balance revenues are inorganic -- sorry, are all organic revenues. So INR 60 crores came from the 2S Brazil acquisition because it was like 2 months and first quarter of them, which is basically the June quarter is normally weak for them because they are into a networking and the Cisco partners and all those things. So they contributed INR 60 crores. On the cash flow side of it, so when -- so one is that I'm talking about the operating cash flow. When I'm saying operating cash flow is basically that there will be involvement in the working capital and all those stuff. But from an investment perspective, our investment in the talent, our investment in the people and all those things to secure this type of order book and to increase to convert the pipeline into orders and to hiring, let's say, the best world-class people and all those things, that is largely done. We will continue to obviously hire more people and all those things. But right now, it looks like that from operation, our cash flow will be positive and then the cycle of the cash flow will automatically pick up with the growth what we are looking at in this year. On the, let's say, order backlog side of it, you are absolutely right, Deep, is that most of the growth is coming with all the execution of these projects by, let's say, end of the quarter 3 and quarter 4, and it will spill into the next year. So that will go -- let's say, the growth will spill into FY '28 with the order backlog what we have because, see, a lot of execution is also dependent on the customer. We have received -- like, let's say, this order what we have announced, we have received that order from another hyperscaler. Now that order, we were talking -- we are talking since so many days. And the real -- the work on the ground, the hiring and all those things will start, but the work on the ground will start only from November onwards. So from -- and that -- and then again, it will scale up. So it is not like that, that you receive the order and you start working tomorrow because these are not smaller orders, smaller contracts. They are large sites. They are gigawatt plus sites. They are not like a smaller site. So, there is a lot of deployment and all those things which happens on that. So because of that, the growth will be -- growth when we will project about FY '28, you will see that there will be a growth over the current year. So let's say, current year, if we grow between 22% to 25% or around, let's say, 25%, then the next year growth of FY '28 will be over and above those numbers. And that is why it doesn't look like very, very conservative to us in terms of the numbers what we are projecting at between INR 7,800 crores to INR 8,000 crores.

Yes. This is very clear. So actually, you answered my follow-up question to the extent that you clearly suggested that the reason this year numbers aren't conservative is that some of the order backlog or rather a large part of order backlog would actually flow in '28. Is that assessment correct? I'm just asking for absolute clarity.

Correct. Correct. That is correct. And that is why -- that is why when you see our order backlog when we have given a guidance for order backlog, that is we are saying $1.3 billion to $1.4 billion, and that is why we will end up with an order backlog. I may say and probably Sanjeev will add more on that. The order backlog may be a little bit conservative because we will add more orders between, let's say, November, October to March when we will burn these orders what we are getting right now out of the 950. So probably that number may be higher, and then we will -- I think we will be having a full clarity after when we announce the quarter 2 results, and then we will see that how we can have more clarity and more speaking on that.

The next question comes from the line of [ Vivek Choraria ], an Individual Investor.

I just wanted to touch on the non-data center part of the business because most of the growth that we are talking is coming from that piece. Is the non-data center piece sort of just treading along? Or are you expecting growth? Or is it a case that we are classifying some orders as a data center? I just wanted some clarity on that.

No, I'll take that. So yes -- so clearly, the hyperscale cycle is larger at this time. The non-hyperscale enterprise will grow at modest double-digit 10% odd. For mining, we are putting at 25% odd at this time. The cycle for the enterprise, Vivek, will follow. The data center infrastructure is not being built to be consumed on its own. The impact of the data center infrastructure would come through a lag when the infrastructure will start to dramatically change downstream airport infrastructure, hospital infrastructure, bank infrastructure. So, this is being made for them. This infrastructure is being made for what? It's being made for drive efficiency, experience for end users like you and me and our workplaces, right? So we're expecting -- we are beefing up, seeing large-scale projects also coming through in our infrastructure on the enterprise side. For example, when we do data center infrastructure for a bank, that's our bank business. That is not a hyperscale gigawatt. That's 10 megawatts, 20 megawatts. Still large. Many years ago, it was 2 megawatts. So it will have that. The entire network infrastructure to connect will change. A case in point, just to give you an example so that you'll understand, if the headend changes, if you were to see a 4K HD video, you need a device downstream that will support that. So if the headend changes, which is in this case, is a massive infrastructure for data center, the consumption actually, the inference is happening at the end user, passing through an airport, getting into a hospital, going to a consumer store, ordering food, it is coming, right? So, we are bullish on that as well, but it will come through a lag. So, a standard double-digit growth in that side, maybe 10%. We are focused on 300 customers, as Deepak called out. But we are catching the hyper cycle on the AI build-out. And we expect as we move forward that we will see our momentum on the enterprise also catch up with a lag.

Sanjeev, just a word on the TPS business. I mean, our growth -- I mean, our revenues have jumped up, but so have the EBIT losses. Is it a matter of scale after a point at which we will start delivering positive numbers?

So our product business also, we're expecting in the current year to be able to grow in the range of 20-odd percent. It's a matter of scale. We have again narrowed down our focus on only mission-critical infrastructure in that space. We are doing a lot of products. We inherited through historical. So, we are now focusing on visualization products, which we call KVM, RML product. And we are seeing strong momentum. We will see through in the coming quarters, the spike in that as well. We're investing in next-generation AI-led products in that space. So yes, to that extent, I expect the growth this year catching up, ballpark around 20% range, still lagging our overall growth plans, but highly accretive. But as we move from there, every dollar that comes in as we move into next year and years beyond, we'll become accretive overall here.

Just one last question, Sanjeev. I mean, the growth that we are projecting in the Q2 -- I mean, the ask for the H2 will be almost like a 30% to 40% growth year-on-year and even quarter-on-quarter. Are we confident? Because we've been talking about some delays in execution. I mean, what gives us the confidence that Q3, Q4, we should start getting demand?

So, no delays. So, no delays on execution from that perspective. Enough backlog coming at the opening of quarter 1 to push through -- to push us through if you calculate the order backlog plus the booking goal and the revenue projections, the math will work out. So, we're expecting to grow each quarter sequentially year-on-year going forward.

[Operator Instructions] The next question comes from the line of Nandan Arekal with JM Financial Limited.

Yes. Congrats on a great set of numbers. Congrats team on a great set of numbers. So, my question is on margins. We expect to end the year at 10% EBITDA margin, and I think we have given a guidance of 9.3% to 9.4%. So, does that mean maybe Q2, Q3, we'll see slightly depressed margins and then we expect the operating leverage to kick in? And also just a thought on what will be the gross margins you're building in for the data center orders?

So, I'll take that. So, I think -- yes, so I think our goal remains 10% and over. That's what Deepak called out. So as we look at the overall year, we expect our -- as we move forward, our Q4 to be in that range or more. But we also continuously are looking at as we scale this business up in the current year with the order backlog. We are looking to invest in talent and training. We are getting into a very large-scale build-out of multi-billion dollar backlogs. This project execution also requires some investments in training. So, we are being cautious on that. But having said that, at scale, we expect that we should be able to deliver at 10% or more. But I think it's better to factor in what we are planning to invest and therefore, guiding where Deepak had guided at about 9.4%, 9.5% at this time. But I think we remain focused on that to get to 10% at scale, more than 10%.

Got it. That was clear. On the order backlog, right, so currently, I think the blended average where you have indicated at around 18 months, so based on your -- the pipeline and what will get executed and what you see coming in, in the next few quarters, what do you expect like the average tenure would be by the end of this year?

So the tenure for large-scale projects, Deepak alluded about 24%, 36%. I had told earlier the goal for this year for order booking, and that's showing in our current forecast as well and guidance is 50% more than the last year ballpark in the range of $1.4 billion, $1.5 billion. So, that's what we are planning to book, and we are well on our track to do that or exceed that at this time, right? To earlier point that Deepak said, some of these orders require preplanning from when they start to burn into revenues. So yes, we will end up the year after you do the calculation of where we opened up and book and take about INR 8,000 crores, we'll open up a very, very healthy backlog that will possibly cover the growth for next year pretty much from the backlog itself. It will be very, very evident, right? So yes, from a data center margin perspective, I think it remains accretive for us at this time. As I said, I think we continue to focus on our operating margin for 10%. At scale, we believe it will be equally accretive, if not better.

[Operator Instructions] The next question comes from the line of Mohammed Nameer with Eiko Quantum Solutions.

I have just one bookkeeping question about the tax rate. Our tax rate is currently low. And going forward, what will be the tax rate?