MPS Limited (MPSLTD) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Q2 FY '24 earnings call of MPS Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Arora, Chairman and CEO. Thank you, and over to you, sir.

Thank you. Good morning from New York, and welcome to our H1 and Q2 FY '21 earnings call. Today on the call, I have with me from MPS, Sunit Malhotra who is our CFO and joined us from Noida, India; Sukhwant Singh, Chief Operating Officer, India at MPS Limited joined us from Noida, India; Tony Alves, Senior Vice President and Head of Product Management at HighWire powered by MPS. He joined us from the Greater Boston area. Rajesh Jumani, who is the Chief Revenue Officer of our eLearning practice. He joins us from the Devon Conference in Las Vegas. Today Sunit will take things off in our open opening segment by discussing our financial performance, then Sukhwant will update us on the development in our content business. Rajesh will then discuss how we are expecting our eLearning business to deliver a strong H2. Tony will then discuss the exciting progress in our platform business. Finally, I will provide an update on our progress on AI and our acquisitions, share back guidance for FY '24 as I promised on the last call. And finally conclude with an announcement regarding dividend distribution. We will then open the call to questions. Let's get going. Over to you, Sunit.

Thanks, Rahul. MPS recorded 9.51% revenue growth over the previous year in the first half of FY '24 on an FX-adjusted basis, that grew by as much as 27% and was at INR 60.33 crores in the first half of FY '24. H1 has now laid a solid foundation for us to unlock a steeper growth trajectory in the H2 FY '24. And while Q2 was seasonally modest, we continue to remain bullish about the growth prospects in FY '24 with a robust H2 and a meaningfully and positively different Q4. Reflecting on H1 and Q2 FY '24, here are my top 3 favorite themes. Number 1, revenue growth continues to lead to margin expansion. Number 2, our platform business is building momentum every quarter, and our outlook is more optimistic rather than cautious on this business segment after a long period. Third, diversity continues to be a recurring theme for us across all key business metrics, which includes reduced customer concentration, favorable business mix and unparalleled customer spread across markets. I want to hand it over now to Sukhwant to discuss our development in our CS business.

Thank you, Sunit. The Scolaris lines of the Content Solutions business continued to lead the charge towards revenue growth and margin expansion. In the Scolaris marketplace, we have launched new capabilities linked to the Journal Editorial Office, or JEO, that are placed in a more strategic position in the value chain, which has not only resulted in new business from net new customers, but also improve the stickiness and quality of our revenue with existing customers. Together with the HighWire suite of products, this new JEO service compounds our capabilities and positions us as probably the only vendor partner with technical and domain expertise at the front end of the Scolaris publishing value chain. Additionally, our star account strategy in the Scolaris market is yielding excellent results, and we are hoping to scale the strategy to other business segments, too. The education side of our Content Solutions business had a seasonally modest Q2, which is expected to correct itself in the second half of the year and particularly in quarter 4. As a result, the revenue growth in Content Solutions in the first half of FY '24 was contained at 7.7%, but I continue to remain bullish about content solution in FY '24 with a robust second half ahead of us. I want to hand it over now to Rajesh to discuss how we are expecting our eLearning business to deliver a strong H2. Over to you, Rajesh.

Thank you, Sukhwant. eLearning continues as the second largest business segment. FX-adjusted revenues were INR 65 crores in the first half of FY '24, amounting to 25% of our total revenue. While the India entity, which is the largest in our portfolio had a seasonally modest Q2, our outlook on the business for the rest of FY '24 continues to be bullish. All critical lead indicators for revenue, including order book and high probability deal pipeline appearing positive. We are hoping to announce a large experience center project in the coming months. The eLearning operations in Europe are doing much better than expected, particularly in the challenging macroeconomic environment. TOP SIM revenue grew by 15.6% in Q2 of FY '24 compared to the same period last year. And though margins were suppressed in the same comparison, the team did better given the current situation in Europe. On a half yearly basis, TOP SIM revenue grew by 21% compared to the same period last year. MPS Europa is performing exceptionally well. Revenue grew by 50.5% in Q2 of FY '24 compared to the same period last year at a PBT margin of 22.7% in Q2 of FY '24. We also have a more diversified customer base and a healthier pipeline, thus indicating that the current performance is sustainable. The acquisition Liberate Learning has been successful. After the flurry of integration activity in the first 4 weeks, Rod and his team are steering the business independently. The marketplace has reacted favorably to the development, and we are gaining momentum in the APAC region. In H1 and Q2 of FY '24, a consolidation of Liberated Learning revenue and earnings were restricted to 1 month. I will now hand it over to Tony, who will discuss the exciting new phase of growth and expansion our platform business as entered. Over to you, Tony.

Thank you very much, Raj. MPS' platform business, marketed as HighWire has entered an exciting new phase. On the back of double-digit revenue growth for the first time since the acquisition of HighWire in the first quarter of 2020, the platform business did well in Q2 FY '24. Revenue grew 7% on an FX adjusted basis in Q2 FY '24 over the previous year. Since the operating leverage in the platform business is the highest across all of our segments. PBT grew even faster at approximately 55% in Q2 FY '24 compared to last year. Overall, on a half year basis, revenue in the platform business grew by 10% in the first half over the previous year and PBT grew by 54% in the first half over the previous year. Execution of our product road map was on schedule for the entire platform suite in Q2 FY '24, and the marketplace has responded well to those new features and functions. There are several monetization opportunities as we implement new clients and migrate some existing clients to newer products. We have 2 product launches planned in the business segment and are confident that these will create new revenue streams in the longer term for MPS. Earlier this month, we launched DigiCore Pro. This is an end-to-end publishing workflow solution based on the principles of single-source publishing, a methodology that reduces inefficiencies and increases the speed of delivery for our clients. This new publishing system supports content authoring, online submission, editorial and peer review tracking, interactive peer review, post-acceptance production tracking and delivery to hosting platforms. This new workflow product will open up opportunities to engage and bring on new customers who are looking to move to a more modern workflow system. It provides opportunities to bundle products and services serving as an on-ramp to sell content services and other technology solutions to those clients. And it allows us to sunset older workflow solutions, creating efficiencies internally. Next month, we're launching THINK365, the cloud-based version of our Think e-commerce and subscription management system. THINK365 is a Software-as-a-Service model and the modernization of the current desktop version. This means that clients will benefit from the convenience and the efficiencies that the SaaS system offers such as less IT and system administration, automatic upgrades and an improved user experience. We believe that this compelling option will be well received and that I think clients will be eager to upgrade to this improved service. To conclude my remarks on the platform business, I'd like to highlight. Our mission has now transitioned from support and delivery to product development. This includes new product launches, active product road maps and upgrades. Our new customer acquisition strategy that involves product and service bundling, for example, of DigiCore Pro and our price warriorship is gaining traction and helping us to develop a new customer base. The feedback from the industry and the Scolaris community is highly encouraging. HighWire and MPS now stands as the only serious independent choice since 2 of our larger competitors have been acquired by publishers. Our agreement with our core customers has significantly improved in the platform business with discussions underway on cross-selling. We also have a robust pipeline of RFPs as new customers. Overall, the platform business has progressed from consolidation to a growth phase. Back to you, Rahul.

Thanks, Tony, and thank you, team, for the comprehensive update. I will start now with an update on our progress as MPS Lab in AI/ML and that continues to be top of mind in the industry and the marketplace at large. The advances in AI/ML have a supported impact on the entire ecosystem, affecting our customers, competitors, industry and the macroeconomic environment right. Instead of perceiving it as a threat, we're viewing it as an opportunity to differentiate ourselves once again in a market that's highly fragmented and drive for consolidation. To spearhead this transformation, we earlier had launched a new initiative called MPS Lab which is pioneering our AI initiative. It's headquartered in Bangalore and has a team of over 100 professionals with relevant expertise. We have made substantive progress this past quarter. Our teams have played a pivotal role in scaling up AI/ML application and content profiling, workflow routing and the type setting and composition of standard layout product. Our pilot in collaboration with our customers, leveraging AI/ML in the creation of all techs to make content acceptable have now transitioned into real projects and real workflows. With MPS LAB as our innovation hub, we are driven to continuously push the boundaries of unlocking AI/ML within our capability set, ultimately enhancing our offering and cementing a leadership position in the market. Now moving on to acquisitions, dividend distribution and PAT guidance. As I shared earlier this year, we expect to close 1 more acquisition in FY '24, potentially related to our platform business. I would like to confirm that we are now pursuing acquisitions of healthy, at least 15% EBITDA businesses, but also growing at least a 10% revenue CAGR over 3-year period. On capital allocation, as I've shared previously as well, our priority is always to redistribute surplus fund with shareholders in MPS provided there is no imminent use fund over the next 6 to 12 months. This approach allows us to be focused, disciplined and responsible. At this point, we believe that even after concluding the upcoming transaction, MPS will be sitting on surplus funds. And therefore, the Board of Directors has recommended an interim dividend of INR 30 per equity share of INR 10 each of the company. For future acquisitions in FY '25, as I had mentioned previously, we are comfortable raising debt to the level of our PAT, which, as you know, is also growing. Based on the strong foundation laid in H1, our management team feels comfortable sharing that we are moving towards achieving about INR 130 crores in PAT in FY '24. Let us now open the call to questions.

[Operator Instructions] The first question is from the line of Mr. Keshav Garg from Counter Cyclical CMS.

Sir, I'm trying to understand that, sir, for the second quarter, except for our platform division, both our other divisions have shown a degrowth in absolute profit number year-on-year. Sir, so why is the -- what's the reason for the same? And is this trend expected to continue or expect it to reverse going forward?

Yes. So like in the opening remarks, Sukhwant and Jumani both shared that in certain lines of our business, we had a soft Q2. Having said that, we are expecting a pretty significant ramp up in Q3 and Q4. Some of that is -- some of the margin erosion is a result of costs that we are investing in, things that we're investing in to deliver on the Q3 and Q4 numbers. So sometimes when you're expecting large projects, you have to onboard headcount and invest in those projects before the project begins. But so some of the margin erosion is because of that upfront investment for future growth. In terms of revenue, I think, like I said, due to a seasonally modest. Last year, Q1 was seasonally modest. So every year, we seem to have one quarter where we don't form a uniform pattern. But I always judge the business on a yearly basis rather than looking at minor movement on a quarterly basis. So like I shared at the start of the call, we are very comfortable reporting that confirming that we will cross INR 130 crores in PAT in FY '24. You may note that as a management team, we have always been extremely conservative with forward-looking guidance. The last time I offered this type of guidance was last year when I shared that we will achieve a PAT of INR 100 crores, and we went ahead and achieved INR 109 crores. So we typically are very conservative with our guidance. And on a conservative basis, we're sharing that we will cross INR 130 crores in PAT in FY '24.

So that's really great. Sir, just one more thing about the acquisition of this Liberate group. Sir, prima facie looks very attractively priced. So but we still have to buy the 35% minority interest. Sir, what exactly is the pricing arrangement for acquiring the remaining take? Is it that we will have to cough up a significant number of -- I mean, a significant amount? Or is it in line with the acquisition of 65% only?

Yes. So overall, this particular quarter and the first half, the consolidation of Liberate learning has only been 1 month, even within that 1 month, though, they have delivered over 35% EBITDA margin. And also grown over the previous year as well, although we didn't own the company the previous year. And in terms of the step-up, we have acquired 65%. We plan to acquire the balance 35% over a 2 to 5-year period. Now all future payments are linked to how the business grows and at what level the business grows. But from a range perspective, we expect the payout of the 35% to be in the 4x to 7x range of EBITDA earnings for that particular year. So as you know, MPS obviously is operating at a higher multiple. So we do believe that it will be accretive to the current setup, whether it's 4x or 7x will be determined by how much the business is growing and is given pretty significant growth milestones for the management team there.

[Operator Instructions] The next question is from the line of [ Mr. Mathur Rathi ] from Counter Investments.

Sir, when I look at the number of employees that have increased in our Content Solutions and Platform business. Sir, the number of employees have increased at a much higher rate than our first half revenue. So if you could help me explain because last quarter you had guided that we'll be using tools of automation or ChatGPT and that will help us like increase our revenue at a faster rate. So if you could, just help me understand this.

Yes. So just a quick answer is hiring a new employee, hiring is leading, revenue is lagging. So essentially, we're expecting a very strong H2 and to make sure that it's a sustainable level of growth and we over deliver on customer expectations, we've invested to make sure that new revenue transition onboarding of new customers onboarding of new process goes without any disruption and customers gain confidence in MPS. So we continue to automate MPS is the leading vendor partner in the marketplace when it comes to automation and leveraging on system-based delivery to unlock efficiencies. So what you're seeing here is hiring is leading revenue is lagging. And in Q3-Q4, those numbers will start to make sense again.

Your next question is from the line of [ Mr. Rishikesh Kale ], who's an individual investor.

Yes. Actually sir, the question was answered when you gave a guidance. So reasonably, we would expect the -- since you're always are very conservative, can we expect around INR 140 crores to INR 150 crores, [ 145 crores ] PAT this year?

Thanks Rishikesh, I know you always push me in this direction. Like I said, we are a conservative management team. We are not conservative in our approach. We're not conservative in our process. We are extremely aggressive when it comes to our work and our pursuit of excellence. But we are conservative in how we communicate our success and communicate our vision. So we like to stick with the conservative communication of -- that we will cross INR 130 crores in PAT. But of course, the team is an aggressive team, a competitive team and we will be pursuing to maximize, we will not limit ourselves to any ceiling. So that 130 is not a ceiling. It is simply a number that we're sharing that we feel that we will comfortably achieve without a flat. And of course, you are more than welcome to do your independent analysis based on our past track record and how we shared guidance previously and extrapolate what that could potentially look like. But at this point, we would like to stick to the guidance of INR 130 crores.

And one more follow-up question. You said about an upcoming acquisition. We have right about almost INR 160 crores cash. And you said that it is more than enough to basically carry us through and fund the future acquisitions as well. So with this dividend, we would probably go below our benchmark of INR 150 crore holding of cash. For a short...

Yes, I think it will be for a short period of time because -- so we anticipate -- and I can share that as well. We anticipate the new acquisition to be somewhere in the INR 50 crores to INR 70 crores range, that's still ongoing. But we also don't see the point in just sitting on cash and not do anything with it. Because, first, it's a distraction. That's not our core competence. Managing cash and treasury and non-operating investment is not a core competency. And plus, the business is also generating cash on a monthly basis. So if you're able to complete this acquisition this year, there'll probably be at least a 6-month gap for the next one. And in that 6-month gap or potentially more -- we will be generating more cash and that is an option. So we feel very comfortable that they may, for a very short period of time, then we will go below 100 possibly on the cash in the business. And I think that's good as well because I am slightly dissatisfied with how we are creating cash in the business. We historically used to generate cash much faster. And I think it will be good pressure on the team to get back to the old levels. It's definitely -- we've implemented several initiatives, process chain, system change, communication change, delegation of authority. We've rolled out a lot of new things in the last 6 months so that we can step up the pace when it comes to cash generation in the second half of the year and for the foreseeable future. So feeling quite comfortable even if the cash levels go below INR 100 crores for a couple of months.

[Operator Instructions] The next question is from the line of [ Mr. Dashil ] from Crown Capital.

Congratulating on a great set of numbers. So most of my questions have been answered. So just 2 questions, sir. One, do we see any risk in may be meeting our guidance like some macro factors or some economic factors that can be a hindrance to us? That's number 1. And what kind of growth with the new acquisition that we've done, can we think for FY '25? Any guidance in terms of revenue or PAT that you would like to do? Those are my 2 questions.

Sure. Thank you for that question. So I think -- and I also like to use the previous question as well, I missed the thought there. So overall, I think the guidance is conservative. We are not -- at the end of the day, we've had an opportunity to look at the first 2 quarters. And basically, if you think about it giving a guidance for the next 6 months -- not even 6 months, October is gone. That'll be 5, give you 5-month guidance. So I do not anticipate any macroeconomic or any industry headwind or anything like that playing out in the next 5 months. And that's one of the reasons why we typically give this guidance at the end of the second quarter because we've had 6 months of historical published financials, but we also have another month, 2 months of Q3 as well. So we are able to give a very conservative site guidance. So I do not expect any hindrance to that guidance. And assuming that we do perform the way I'm describing, there will probably be another round of distribution that will take place to the shareholders in May when we announced our final FY '24 results, that's the thought that I did not unlock in the previous question. So what we're distributing today is nearly an interim dividend, there will be a final distribution as well. On FY '25 guidance, like I said, we are extremely aggressive in our approach and how we pursue our goal. We're a competitive team, but we are highly conservative, when it comes to communicating our success as well as communicating our goals. And that's just -- they're humble team and we want to want to keep it that way. From a guidance perspective, I have shared Vision 2027, which basically means that we want to get to a certain level of revenue and profit by FY '28. We expect the growth -- the CAGR to be around 25% between now and FY '28. So in that CAGR, 60% of the growth is going to come from acquisitions, 40% of it is going to come from organic growth. So [ 500 to 900 organically, 900 to 1,500 ] inorganically. So that's the kind of outlook we like to share the FY '28 outlook. There will be some years where we will be way above the 25% CAGR year where we will be a that number. So time will tell whether it will be below or above that number. But on a CAGR basis between FY '23 and FY '28, we're expecting a 25% CAGR.

Just one more question. So on the acquisitions, we wouldn't be fitting our profile margin in terms of price? Or would that be like maybe a year or so even maybe getting the efficiencies for it to become enough margin accretive? How will that play out? Because we have increased our margin substantially over the last few quarters. So just wanted to get some color on that, like how our target acquisition panning out?

Excellent question. So on the -- again, it has to be specific to that particular acquisition. So what we expect is, for example, the Liberate learning, they're acquiring a company that's already operating at 35%, 38% EBITDA margin and they are in the eLearning vertical. Liberate margins are better than our standalone eLearning business. So yes, we expect to improve margins in our eLearning business, but potentially not in Liberate but more in the standalone business. In fact, learning a lot of things from how Liberate does business, and that will unlock future margins. For example, they have more people outside the company and inside the company, so they have more contractors than they do have internal personnel. So there's things like that on the operating model that we are learning from them. So on a standalone basis, the eLearning margins will improve. Now coming to future acquisitions, it will really be dependent on the acquisition itself. We will not acquire anything that's below 15% EBITDA margin on a standalone basis. That's for sure. And we want to make sure that on the content side, we are north of 40% on the platform side, and north of 45%. And on the eLearning side, we're north of 30 and some point. So if we do acquire something that's less than those numbers, then we will -- our goal will be to get down to that level in 6 to 18 months. As of now, like I said, we do -- we are not expecting any margin erosion as we scale either organically or inorganic.

[Operator Instructions] The next question is from the line of [ Mr. Mahesh ] who is an individual investor.

My question is on eLearning. eLearning is roughly 25% of total revenue currently. What is the target number by FY '27 or FY '28?