MPS Limited (MPSLTD) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the MPS Limited Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Arora, CEO and Managing Director. Thank you, and over to you, sir.

Thank you. Good morning, everyone, from hazy New Delhi. Welcome to the MPS Q2 FY '21 Earnings Call. Trust you're all safe, healthy and staying positive. I have been in Delhi since mid-September after spending time with the HighWire teams and customers in the U.S. in July through early September. In our opening segment, I will discuss our consolidated performance in Q2 and how the business recovery is shaping up since the turbulent Q4 last financial year. Sukhwant Singh, Senior Vice President of Content Solutions, will give us a quick overview of the business; while Harsh Gupta, VP of Growth, will discuss the eLearning business segment. I will wrap up the business segment discussion with a brief overview on platforms and finally conclude with the road ahead with HighWire now part of the MPS family. We look forward to interacting with all of you over the next hour. MPS achieved a new scale in Q2 FY '21 with revenues just north of INR 110 crores, which is the highest in any quarter since MPS was founded back in 1970. While this is largely due to the acquisition of HighWire, and PBT has historically been higher than the INR 19.54 crores in Q2, the road ahead looks promising with several initiatives underway to improve margins across business units and subsidiaries. And we expect satisfactory improvement in profitability every sequential quarter for the next several quarters without any presumptions or outlandish organic growth expectations. You won't get any forward-looking numbers from us, but we can confirm that we are overall optimistic about FY 2022. Sukhwant, over to you to provide commentary on the Content Solutions business as we saw it in Q2.

Thank you, Rahul. Good morning, everyone. So the momentum in core business was somewhat sustained from Q1 with INR 54.27 crore and INR 15.03 crore in revenue and PBT, respectively. Our teams have been diligently working to rebuild the core business after the decline in several of the top 15 customers last year, where revenues in Q4 had declined to sub-INR 50 crore levels for this segment. The focus has been on addition of new customers and growth with existing customers through superior delivery, quality and an overall consultative approach to solving problems for customers real-time as they manage the complexity of their rapidly changing environment. We have seen some early signs of success in business units where quick recovery is possible, including MPS North America and notebooks that are linked to educational publishing. Thanks. Over to you, Rahul.

Thanks, Sukhwant. Keep up the momentum. I am sure everyone on this call is equally, if not more eager than the revival in our core business, is here to stay. Harsh, please shed some light on our eLearning business.

Thanks, Rahul. As shared in the last earnings call, COVID-19 has had the most severe impact on our eLearning business with us suffering losses in both quarters this financial year. Given these developments, we have reorganized our operations to be leaner and more efficient across the entities in India, Germany and Switzerland and expect profitability from here on. There are also several digital marketing initiatives underway that have opened up interesting opportunities for the consolidated eLearning business, and we are now seeing a relatively healthy order book and pipeline. The new work environment has posed all the organizations to reimagine their learning and development strategies with a strong focus on digital learning, and we believe that this will have a positive impact on the business in the medium term. Conversations for large opportunities, which are unfolding due to COVID-19, have been reinitiated. Our teams are hopeful that the pause that we saw in this business is now gradually being lifted. Thank you.

Thanks, Harsh. Wish you and our teams best wishes and all the support you need in reviving the eLearning business. Intuitively, this segment should grow by MPS with education institution customers as well as corporates. Moving on to the review of our platform business. The platform business is now 40% of our overall business since the acquisition of HighWire on July 1. The revenue and PBT for this business were about INR 42.81 crores and INR 8.60 crores in Q2 FY year '21. This change in composition of business with a larger proportion from platforms could have several strategic considerations in the medium term. First, profitability should improve significantly for the overall business, given the lower marginal costs related to scaling platform business. Our aspiration is to at least double the profit margin percentage for the platform business in FY '22 from the 20% in Q2 of FY '21. Second, revenue in the platform business tends to be sticky. What that means is that agreement to customers are a minimum of 3 years. Baseline revenue and volume of revenue is locked down. Any volatility in revenue is limited to custom projects. Switching cost for customers is extremely high. And even if they decide to switch off, the time taken to migrate our platform is in the range of 6 to 18 months. Partnerships -- third, partnerships are elevated and more strategic due to the value creation and the criticality of the platforms. Engagement now moves from VP level to C-suite. Fourth, opportunities should open up in other areas of our business, including content and learning, as a positive consequence because we are more visible to a larger and more senior customer base. We now also have a good case study in our THINK business that we acquired back in 2017. We saw double-digit growth in revenue and profits in THINK in Q2 FY '21 compared to the same period last year. This growth in THINK is from addition in new logos as well as custom projects with our existing customers. The success in THINK can be scaled to the other platform business and as a result of key operating factors, including 0 tickets in backlog and customer service, strong project management and custom projects; decisive product road map, which is finally signed off by our customers; active engagement with customer base through a vibrant user book; and finally, we are ahead of our competitors in user experience, functionality and reliability of THINK. Given that we've been able to develop a scalable operating model at THINK, we are hopeful that the balanced platform ecosystem should also scale in growth on the successful implementation of our operating model for platforms. And we are already seeing signs of success early in HighWire. We acquired HighWire, as was mentioned earlier, on July 1, and we've completed 1 full quarter with the company. Over the course of a quarter, the reliance on HighWire was not that well managed. And after attacking each business problem and aligning the business to our overall operating margin, we ended the quarter with early double-digit profitability. This is our first acquisition since 2012, where the acquisition has shown healthy and sustainable profits in the first quarter itself. Overall, the wonderful teams at MPS have navigated us out of a steep decline in last financial year to a position from where we can grow profitably and that's, too, in the middle of pandemic and at lower economic prices. I'm extremely satisfied of how we have held our own and can look to the future with tremendous optimism as MPS recovers and unlock its true value potential in the coming quarters and the year ahead. Look forward to all your support through this phase. Let's now open the call to some questions that can help us do better at what we do.

[Operator Instructions] The first question is from the line of Nilesh Shah from Envision Capital.

Yes, Rahul. But now, Rahul, I just want to kind of understand that how confident are you of the future growth prospects? Because it's been now several quarters, several years. We've been trying to do so many things. We've done acquisitions, all of that. And even if I were to kind of eliminate the pandemic, prior to the pandemic itself, our operating profits have been pretty flat for 4 to 5 years. So what's the game plan going forward in terms of growth? And how confident are you of being able to kind of take back MPS onto the pre-2015 growth path that it was on? Because at some point of time, something or the other is impacting us, whether it gross, whether it is margins. Is it some division, some new acquisitions? So can you kind of, in a way, tell us how confident are you of the future growth profits of MPS?

Thank you for that question. I think yes, I think we -- I wouldn't say that we haven't grown since 2015. We've hit -- from a revenue standpoint, we've now hit a new scale. We've done INR 110 crores this past quarter, which is our highest in any year. And as you know, we're fairly competent at managing our costs. So from a growth standpoint, I think we've achieved a new level of scale from a revenue standpoint. That should continue going forward. From a profitability standpoint, we are in a business that is rapidly changing. Publishing -- our customers are still getting disrupted. But I think what we've done here is we have actually looked at where the market is moving, and we've kind of reconstructed our business. And platforms, as I said in the opening remarks, most -- publishing is our core customer base, and platforms tend to be more sticky when it comes to engaging with this customer base. From a profitability perspective, we had a -- so this is our first -- I think we've learned from experiences. This is our first acquisition that has made a profit in its first quarter and should only improve, as suggested, from here on, given that it is a platform business, and there is cost arbitrage to unlock. We have had -- the pandemic has impacted our eLearning business. We've seen a 30%, 35% share in revenues. It's taken us time to adjust to that reality. For example, in Q2 alone, we saw -- and I'm ballparking here, we saw losses of about INR 3 crores at a PBT level in the eLearning business. So that, of course, has significantly impacted quarter 2. We now have reconfigured ourselves to the new reality, to a new level of business. So the operations are more leaner. And we're expecting, for the second half of the year, this loss that we've accumulated in Q2. This business should be profitable from Q3 onwards. So we will definitely see, from a profitability standpoint, significant movement with the eLearning business recovering. So that's one level. The second, HighWire has only made some early double-digit growth -- double-digit margin in quarter 2. And our goal, really, is to run the platform business at a very high level of margin, and we are expecting that we should hit that level by Q1 of next financial year. And then the next 2 quarters should potentially -- every quarter should improve from here. So from a revenue standpoint, I think we now have a fairly diversified revenue base where we are serving a large amount of customers across publishing and corporate customers as well as various geographies. We are engaging with customers across 3 lines of business that are meaty lines of business. And our composition of business has also shifted where we saw, a few years ago, we were 80-20 split between content and platforms, then we have 40-20-20 split between content platforms and learning. And now content is 45, platforms is 40 and learning is 15. And given that there's a higher composition of business, that is a higher-margin business on average, we expect that level of profitability to fully return from next financial year. And of course, we don't expect it to happen overnight. We're expecting gradual improvement every quarter up to Q1. So from my perspective, I think MPS has adapted really well. I can't think of too many competitors in my space that have done an acquisition in the middle of a pandemic at such a competitive purchase price. So we are growing -- we've grown to a new level of revenue and scale in Q2. And we expect to grow to a new level of profitability as well going forward. So from my vantage point, I'm extremely satisfied with how MPS has adapted to the current environment.

Yes. I hope, Rahul, role that your satisfaction plays out really well for all the configurations, acquisitions and all of that, which have been done. So I just hope that whatever have been the learnings over these last 5 years with your leadership, I just hope that over the next few quarters, we start to see results of this. So on that note, good luck, and hope we see better times for MPS.

Thank you.

[Operator Instructions] The next question is from the line of Keshav Garg from Counter Cyclical Investments.

Sir, I'm new to the company, so please pardon my ignorance. I just wanted to understand that I've been seeing your past few years' results, so our profitability peaked out in -- 4 years back at around INR 90 crore. And since then, it has been at a decline even though our revenues have been going up. So if you could just help explain that. What is the reason? What were the factors that led to margin reduction? And do you see those factors reversing going forward?

Sure. So if you look at our previous -- so -- and this goes to do with the composition of the business. We must all recognize -- first, take a minute to recognize what business we are in, right? We're in a business of supporting, essentially, publishing. The end customer base is getting disrupted. So there is huge -- there's always been huge pricing pressure as well as pressure on volumes as customers produce less. So over the past several years, we have been strategizing and trying to figure out how do we continue to reinvent ourselves because this 50-year-old business does need a level of reinvention. And we started to do that by -- we started off by building a platform business. So we acquired mag+ and THINK, and then our composition of revenue was more like 80% content and 20% platforms. From there, we said let's think beyond publishing because we want to have a diversified customer base and not just simply be linked to the fortune of publishing. And then we added our eLearning business with services corporates. And then our revenue was more like -- was split between eLearning, content and platforms in the range of 60-20-20. And we also recognize that the eLearning business tends to be a lower-margin business than our core publishing and platform business. So if the eLearning business tends to run 20 -- well-run businesses run about 20%, 25% EBITDA margin. That's the most you can run in eLearning business, unlike a publishing services outsourcing business, which you can run at 40%, 45% EBITDA. So while we reached a new level of scale, we saw a decline in profitability. We then looked at our composition of business again, and we said that the line our of business that can have stable revenues and sustainable profits is our platform business. And while we've been making significant organic investments to scale that business, growth -- organic growth has been slow in the platform business because switching cost tends to be high for a publisher to switch from one platform to another. And then the HighWire opportunity presented itself, and we started to -- we acquired HighWire, and we're looking at a new scale of the platform business. So overall, our -- like I described, we're now 45-40-15. We must recognize that the content business -- the Content Solutions business, we're running very hard to stay in the same place, right? And there is a need for us to then reinvent the business to build something that as we got hard, we grow the business and not -- don't just stay in the same place. So the content business is more -- is turning out to be more of a business that is -- that could potentially be called a cash cow but not really a cash cow because it is very hard to sustain that level. The platform business is where we expect a high level of profitability going forward. And our eLearning business is a business where we expect growth from, but from a margin standpoint, it is a lower-margin business. So overall, I think it's taken time for us to build, to reinvent a business where we are -- we have eyes on revenue, that our revenue base is diversified enough, that we don't see shocks from 1 or 2 customers impacting our business. We have eye on profitability, where we have a more balanced proportion of business across content platforms and eLearning. So overall, I think what we've done here is we've taken a 50-year-old business set up in 1970 just where everything was just around wage arbitrage to reconstructing it to a business where we're creating value as well as having a diversified customer base as well as having a diversified lever base for exercising profitability.

So, sir, if I got you wrong -- sir, if I got you right then, so does it mean that our content segment will decline going forward or, at best, remain stagnant, and the growth will come from the other 2 divisions?

Yes. So we are looking to continue to grow this business. And I think if we look at it on an annual year basis, we could have some years where we decline. But if we look at it in intervals of 3 years, this business should grow. So like we're seeing this year, in the second half of the year, we're expecting some growth in the content business. But this is -- basically, we'll be going up and down, up and down, up and down, and the range will be plus/minus 5% in the content business. And then we expect the other 2 segments to grow, if that makes sense.

Okay, sir. And sir, also, our eLearning business, sir, what exactly is our niche in this business? Because there are so many players in eLearning. Almost everybody in education space is trying to break into this eLearning. So how are we differentiating our service? And is our offering really superior to what is -- what the competitors are offering?

Yes. So I think in this -- in the eLearning segment, there are essentially 3 types of companies. You have companies that offer off-the-shelf content and solutions, you have companies that offer technology and you have companies that offer custom solutions. We follow -- we fall in the third category through the acquisition of Tata Interactive, where we are essentially creating highly customized learning solutions versus providing off-the-shelf solutions. So the IP is actually owned by our customers. What our real positioning in the market is we are able to take a very dry learning objective. So let's say I want to teach you a quantitative skill or I want to teach you a more of a softer skill like empathy, we -- where we come in is we are able to architect a solution that makes the learning extremely memorable so it's a more impactful learning objective, where we will build out a simulation and make the learner go through that journey. If it is softer, we might create a game or something more engaging. So where -- our positioning really is of being a premium company that is able to take something which is extremely a dry subject and make it really interesting and a memorable learning experience. That's where we really put in. And we do it in a very accustomed manner, keeping the design and the learning objectives of our customer in mind. So we do that for them in a very customed way.

The next question is from the line of Anil Jain from Equipassion Capital.

Yes. I wanted to know what was the revenue from HighWire in quarter 2. And what was the EBITDA margin?

Yes. So I can't share the exact numbers on HighWire for competitive reasons, but I can give you some numbers or at least give you some data. So we acquired HighWire -- when we acquired HighWire, we acquired it at an annual revenue of $17 million. We acquired a loss-making company. And we have made, in quarter 2, early double-digit level of EBITDA.

Okay. The -- was the full integration from July 1 or it was integrated in the quarter?

Yes. So the -- yes, so we bought the company on July 1. So this quarter reflects 3 months of revenues and earnings.

The next question is from the line of Rahul Jain from Dolat Capital.

Yes. Sorry, I could not hear what you said the revenue contribution and profitability. And also, if you could share what is the -- shed the light here in terms of bringing an efficiency number next 3 to 6 quarters.

Okay. I did not give the -- Rahul, I did not give the quarter-level profitability. What I described was that when we bought HighWire, we bought it at an annual revenue of $17 million, I'm ballparking here, and it was a loss-making company. In this first quarter of operation, we have had a full quarter of revenue and earnings. And from an earnings perspective, we made early double-digit level of EBITDA. Overall, from a scale perspective, as we've seen with past acquisitions, we will possibly see that $17 million contract to a reduced number. We do not know what that number is yet. From a margin perspective, we will not be satisfied until we hit a 40% to 50% EBITDA margin in this business, and we expect to hit those kind of numbers early FY 2022. And with every quarter from here on, so Q3 and Q4, we will see significant movement in that level of profitability. But our aspiration is to really build this out. As you're aware, a platform business has very little marginal costs. We have levered -- the levers we have are, of course, cost arbitrage because this is a business that was 100% run outside of India. So we expect to be able to run this business with horsepower in India, and we expect a level of profitability, but we will not stop until we get it that level of 40% to 50% EBITDA margin.

Right. And of course, the revenue shrinkage may also happen when you shift this business. So I think at the time of the acquisition, you have said annualized 13 million was the first half year it could go. So is that the number in your mind even now on an annualized...

That's speculation, right? I mean it's -- we're guessing on that level, but we are not seeing any data to tell us there's going to be 13 million. It's just from past acquisitions, the 6 we've done before this one, it's from that experience. Having said that, if I were to compare it to THINK, for example, we didn't see that level of contraction in THINK. And the reason, as I described in the opening remarks, was that switching costs in the business are very high. And as long as we can support the customers in the way they expect, so we may not see the typical level of erosion in revenue. And even if we do see erosion in revenue, it's not going to be overnight. It's going to be gradual because it takes time for customers to migrate our platform. And given that it's going to be gradual, we are building out a growth team to build out revenue. So we're hoping that on the revenue side, the pace of erosion will not be as fast. And if the erosion does happen, we have an opportunity to build new revenue in that time period. So yes -- so can't really speculate right now whether it will be 13 million or 15 million, what the number will be. Our aspiration is to have 0 erosion if we can or even grow the business.

Absolutely. And so content, you, of course, elaborated. eLearning, you think, still could be challenged in the near term? Or what are the factors that would be comforting that this growth in eLearning can come back to its potential 10%, 15% growth rate? What do you want me to play out for that to happen?

So as you know, in any decline, the first step is to stop thinking about growth and to arrest the decline. When you're in the middle of a free fall, the first stop is stop the free -- stop the bleeding, stop the free fall. So we started seeing a decline back in March, earlier in the year. I think what we've done now is we've arrested the free fall. We've now got a healthier order book. We are now recalibrating the operating model to build profits based on this new revenue level. So we're expecting now -- we've burned about INR 3 crores in Q2. We're expecting to be profitable in Q3 and Q4 and to -- and that is coming from some revenue increase as well as some -- so there's a revenue increase sequentially. So we expect Q3 to be a stronger quarter in revenues than Q2 and Q4 to be a stronger quarter in revenues than Q3. And the second lever, of course, we're doing some cost management. So through revenue increase sequential quarters-wise and through cost management, we expect this line of business to be profitable both in Q3 and Q4, and then we look to then scale from Q1 next year. But we're trying to be sensible about this and make sure that we don't accrue any further losses in this business, reconfigure and then scale. So hopefully, next year, things should pick up from a revenue standpoint.

Right. And lastly, on the platform side, outside of the HighWire contribution, how has been the THINK? Because it's been around in the same band for the last couple of quarters. So how some of the other platforms are doing? What is the near-term potential out in this business outside HighWire also?

So DigiCore and mag+ have been flattish. They haven't really grown. But THINK has grown, I think, in double digits this quarter. And that's a combination of new logos as well as some custom projects. And we are now kind of trying to learn from THINK, from the THINK team, of how we've been able to grow THINK and implement some of those best practices and cross pollinate those best practices from THINK to other lines of business. So yes, so from a THINK perspective, we're growing at double-digit now, and that momentum should continue because once, like I explained, platform business is a sticky business. So once you're able to get that momentum, it kind of takes off. And then from next year onward, we should see the same type of growth in DigiCore and mag+ as well. So we're very bullish on this line of business going forward.

[Operator Instructions] The next question is from the line of Sachin Kasera from Svan Investment Managers.

Yes. Just one clarification. You mentioned that your target is first to hit 40% EBITDA margin in the platform business. So you are referring only to the HighWire part of the business or you are targeting the entire platform segment?

The entire platform segment.

Okay. Great. Secondly, since you mentioned that I -- from what I could sense from the call, of the 3 segments, platform looks to be the most promising segment both in terms of the growth potential as well as in terms of the profitability. So do you think this business can now sustain on its own in terms of organic growth going forward? Or you think that we need to -- while we can bring it to a decent level of profitability of this 40% plus, but as far as growth is concerned, we'll need to keep making acquisitions to keep growing this business.

No. So the -- yes, so good question. So organically, I think, like I was describing to Rahul previously, if you look at our platform business, the main lines are essentially we have DigiCore, we have mag+, we have THINK and we have the HighWire product suite. So the first lever we have and across these customers, we have now over 200 customers across these platforms. So one lever we have is to just cross sell, cross sell like crazy amongst these captive -- because DigiCore, for example, only has 12 customers, right, whereas HighWire, 100 customers; THINK has 70. So one lever is you just cross between -- through cross pollination, you're able to get some growth. And we are seeing signs of success there. The second piece, of course, is each of these platforms now needs to evolve. They have been market leading in their space. But having said that, the platforms need to also have a very active road map. So what we're doing very aggressively is working with customers to make sure that every single platform offering is, in terms of features, functionality, reliability, scalability, is ahead of our competition by at least 1 or 2 years. So that's another level through which we expect to win more RFPs going forward because we should be able to demonstrate both from a quality standpoint as well as from a pricing standpoint. So we are not going to be the cheapest here. That's not our goal here. But we do believe that we also will not be overly priced. We'll be somewhere in the middle of the market in terms of pricing. So through a combination of better quality and good pricing, we should be able to win organically more market share. So cross pollinate, improve the platforms and improve market share. The third being we should also be able to offer services to these customers beyond what they currently work with us on. So this is a new group of customers. So ideally, we should be able to tap into them for custom projects on the technology side, content services as well as learning solutions to this captive customer base. So overall, I think we can expect this business segment to organically grow. But of course, there's going to be a lot of effort involved both from a marketing perspective when we look to cross pollinate, but also from an engineering and delivery standpoint to make sure that any product category is 1 or 2 years ahead of the competition.