NIIT Learning Systems Limited (NIITMTS) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the NIIT Learning Systems Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Vijay Thadani, Vice Chairman and Managing Director of the company. Thank you, and over to you, sir.

Thank you. Good evening, everyone. Thank you very much for joining the NIIT Learning Systems Limited's Quarter 1 FY '27 Earnings Call. I want to start by thanking you for your continued interest in the company and making yourself available at this time of the day in a busy results season where there will be multiple meetings happening at the same time. So truly appreciate your presence and truly take that as a sign of your commitment to help us grow NIIT as well. Our agenda today is to discuss the quarter 1 FY '27 financial and operating performance. Most importantly, we want to -- we are very excited on our AI-first strategy and AI-enabled revenues. and we would like to talk a lot about that. We have been fairly busy with inorganic activity in the last 12 months. And in that process, we acquired two companies, [ [ MST ] Group ] in Germany and [ [ Sweet Rush ] Inc. ] in Costa Rica and West Coast. And both these companies are getting -- becoming part of the NIIT family, and we are excited about how they are contributing, how we are contributing to their future. And then, of course, we have had some new customer wins, which we would love to talk to you about as well as in this very new world, discuss the path forward that the company is taking. This, of course, will be done by Sapnesh Lalla, who is the CEO and Executive Director, after which we'll open it for question and answers. Before we begin, I just do want to say that some comments in this discussion may be forward-looking and subject to risks and uncertainties, and actual results may differ materially, and this should be taken note of. With that, I hand you over to Sapnesh Lalla.

Thank you, Vijay, and thanks, everyone, for joining. Like Vijay pointed out, we know the fact that it's a busy season for you and appreciate the fact that you've joined us as we discuss our performance from the last quarter. I will review our performance and share our view on the path ahead, as Vijay pointed out. Revenue came in at INR 5,651 million. It grew at 25% year-on-year. Excluding the contribution from [ MST ] and [ Sweet Rush ], the two acquisitions we made in FY '26, the revenue growth was 11% year-on-year. Revenue growth in constant currency was 11.4% year-on-year and 2.9% quarter-on-quarter. As a reminder, our Q1 FY '26 base figure had a significant revenue contribution from the North American real estate training contract that we concluded in FY '26. Normalizing for that, our overall constant currency growth for Q1 FY '27 came in at 18% and the organic constant currency growth is 5% year-on-year. I did want to spend a few minutes on how we have performed across different market segments that we service. And I'll take you through our performance in each of these market segments in the next couple of minutes. This is not something that we have done or had a discussion about in the past. So this is net new for those of us who have looked at our commentary in the past. Our industrial sector, which contributes about 20% of our revenue, grew 35% year-on-year in Q1, partly driven by [ MST ] joining the NIIT family. As you might be aware, [ MST ] has significant strength in industrials and energy sectors, and we found both of them in industrials. The [ BFSI ] sector, which makes up 12% of our revenue, grew 33% year-on-year. Life Sciences and Healthcare, which contributes 15%, grew 29% year-on-year. The growth in our largest sector, that's technology and telecom, which contributes 23% of our revenue was slightly muted at 8% year-on-year. The management consulting and professional services sector, which contributes 9% of our revenue degrew 16% year-on-year. These two sectors, technology and telecom as well as management consulting and professional services sectors were affected by two large clients who had pulled back [ L&D ] budgets sharply in the previous quarter in response to business uncertainties. We had called that out in our earnings discussion last quarter as well. The good news is that both clients grew well sequentially in Q1, but are yet to get back to last year's run rate. And we expect that over time, they will get back to that run rate. I did want to also provide a quick update on [ [ MST ] ] and [ [ Sweet Rush ] ], who became part of the NIIT family in FY '26. As you are aware, [ MST ] Group joined the family in July of 2025. [ MST ] is a leading managed learning services provider in the DACH region, specifically based in Germany with deep long-standing client relationships across automotive, industrial and energy sectors. As you are aware, these sectors are undergoing some of the most consequential workforce transformations in Europe today as Germany and countries in the DACH region transform their economies from predominantly industrial-focused to technology-focused economies. It helped us establish our presence in Germany, Europe's largest economy and is a meaningful step in helping us build our European platform. [ MST ] contributed approximately INR 231 million to our quarter 1 revenue. [ Sweet Rush ], who joined the NIIT family in January of 2026 is an award-winning provider of human-centered AI-enabled learning experiences to Fortune 1000 corporations and professional associations. Their offerings span strategic training interventions, certifications, AR, VR and XR immersive forms of training. [ Sweet Rush ] helped us move our revenue mix up the value chain to become more outcome-led, performance critical and inclusive of strategic learning interventions. [ Sweet Rush ] contributed approximately INR 431 million to the Q1 revenue. Both [ Sweet Rush ] and [ MST ] are delivering early synergy benefits. Previous quarter, a leading European automotive OEM and their battery gigafactory became a new client for [ MST ] and an annuity -- long-term annuity client overall. This quarter, one of [ Sweet Rush ]'s long-standing clients, a major global hospitality group has since converted into a long-term managed services engagement, directly validating the project to annuity thesis we established at the time of [ Sweet Rush ] joining the NIIT family. Both of these developments are in line with our thesis for these two organizations becoming part of the NIIT family. I now wanted to spend a few minutes on reporting back on progress on our AI-enabled learning opportunity and the progress that we have made in pursuing that opportunity. One of the most exciting growth vectors in our business is AI-enabled learning tools, technologies as well as solutions. Let me share some details with you on the progress that we've made so far. In the last earnings call, I spoke about the three components, self-improving learning platform that our AI learning practice is developing. the AI coach engine, the simulation manager and the sensing engine. This has now -- this platform has now been deployed as a solution by multiple clients, and we are getting very good feedback from users. In June, we launched our AI-ready [ L&D ] enterprise portfolio, which brings together four integrated solution areas that together equip corporate learning organizations to operate, scale and lead in an environment increasingly shaped by AI. Our AI-enabled services contributed 13% of the revenue in Q4. As a reminder, this has two components: solutions where AI components are embedded into the offering as well as engagements where our AI studio and tools materially contribute to creating and form part of the delivery. NIIT Learning Systems were independently recognized, as you may have noticed, as a market leader in the [ Fosway ] AI Market Assessment 2026 for digital learning. The assessment ranked us the highest in our peer group on our say-do ratio. And what's the say-do ratio? Say-do ratio is the features and benefits that we promise, we are able to deploy. So all the features that we had promised are now in deployment and our clients are able to take full benefit of these features, AI-enabled features in their engagements with us. We were also named to the Training Industry's 2026 Top 20 companies in AI coaching and learner support tools for the second consecutive year. and to its top 20 staffing and temporary resources companies list this year as well, underscoring our breadth across AI-enabled and traditional managed learning services. At this time, I wanted to talk through a very interesting case study, which we -- where we worked on a strategic engagement with one of our key clients, among our largest clients and how this solution was aligned with their strategy and how we executed upon it and the results that they have seen over the last 6 months. One of our large clients, as I mentioned, a global system integrator saw a large opportunity to transform some of their mainframe clients using AI. To address this opportunity, they needed to train their go-to-market team on the opportunity and how to present this opportunity to key CIOs and CTOs across their customer set. They also needed to train their consultants on how to analyze and consult with their key clients and come up with custom solutions tailored to each client's unique landscape. Lastly, they also wanted to create a large corridor of forward deployed engineers who would get forward deployed into their clients and work consultatively with their clients and client organizations to enable the transformation. So three dimensions to the opportunity, go-to-market, consulting and creation of an [ FD CADA ] who could do the execution. Our learning consultants worked closely with the client subject matter experts to come up with hyperrealistic simulations and deployed our AI-enabled training framework across the three opportunity streams, namely go-to-market, consulting and execution. The solution was fully aligned with business scale to make material difference and performed in a matter of months. Like I pointed out, we were able to see not just implementation and execution, but also see significant benefits that the client has gone on and posted publicly on LinkedIn. Our client is thrilled with the outcomes, including the doubling of the total contract value for the go-to-market team that was trained as part of this process. Stepping back, as you can see, we are able to now respond to strategic initiatives that our clients want to take and respond at scale and in a time frame and at a pace that makes a difference to their business. While this is one case study and it's of significant size, we think that as we look ahead, we will see more such opportunities and we'll see clients benefiting from more such opportunities. These are the opportunities which are aligned with business delivered at scale and speed and visibly driving business outcomes. This and other opportunities such as this constitute a very significant scaling opportunity for NIIT. Opportunities such as this will significantly expand the TAM multifold as it expands the buyer set to include business leaders and owners of business strategy within the enterprise. So we are super enthused by the results that we've gained from this opportunity, and we see this opportunity or such opportunities being replicated across a number of our clients. Coming back to a report out on the financials. We covered revenue a minute ago. Let me spend a few minutes on profitability. Q1 EBITDA was INR 1,032 million. It was up 8.5% year-on-year and 3% quarter-on-quarter at a margin of 18.3%, which is within the framework that we had guided for Q1 when we met last. The year-on-year margin improvement reflects the phase -- the margin movement, sorry, the year-on-year margin movement reflects the phased margin buildup of [ Sweet Rush ] together with the continued investment in AI as well as the sunsetting of the real estate contract -- North American real estate contract. Normalized for these investments, the EBITDA margin are in line with our long-term margin expectations of 20%. We expect as business scales, we should be able to get back to close to 20% at the overall level. Depreciation and amortization was at INR 215 million versus INR 205 million last quarter and INR 181 million a year ago. Net other expense was INR 37 million, which comprises of other income -- I'm sorry, other income of INR 166 million, which includes INR 154 million in treasury income and INR 12 million of miscellaneous income due to profit from sale of assets. These are offset by other expenses that include net finance cost of INR 88 million, comprising of INR 46 million in fair value adjustment in future acquisition liability, INR 31 million due to interest on loans taken for financing the acquisitions and INR 10 million due to interest charge on long-term leases. Our ForEx loss stood at INR 62 million, bank and other charges of INR 18 million, CSR-related contributions of INR 22 million and an exceptional expense of INR 11 million towards professional fees towards inorganic initiatives. The profit before tax was INR 781 million. Tax was INR 207 million. Effective tax rate was 26.5% versus 18% last quarter, which had benefited from no tax on the Q4 fair value gain that we experienced last quarter. Profit after tax was INR 574 million, was up 16.4% year-on-year with EPS of INR 4.17. Balance sheet and cash flows remain strong. The trade receivable days improved to 62 days from 65 in the previous quarter and 68 days a year ago. Cash and cash equivalents were INR 9,954 million. They were up from INR 9,366 million at the end of FY '26. Net cash was at INR 7,364 million compared with INR 6,692 million at the end of FY '26. Operating cash flow for the quarter was INR 758 million, representing 73.4% of the EBITDA this quarter. The free cash flow was INR 616 million. The CapEx was at INR 144 million, ROCE at 31% and ROE at 18% for the quarter. The employee headcount was 2,496. It was down 50 quarter-on-quarter. I also wanted to spend a couple of minutes on the strategic market opportunity that we are chasing. The market opportunity, as you are aware, is immense. It's $400 billion in global spend on corporate training. As you are aware, and we have mentioned, only about $10 billion of this is currently outsourced and represents a very small level of penetration. We expect this to change in the coming years as companies look for improved efficiency, greater variability in their fixed costs and growing focus on training outcomes. Additionally, the accelerating adoption of AI-enabled learning is throwing into sharper focus, the inadequacies of in-house training organizations, as a consequence, we believe the propensity to outsource will only increase bring market expansion and a multiyear or even a decade growth opportunity. We believe that NIIT Learning is well positioned to capture a disproportionate share of these opportunities, underpinned by our proprietary learning methodologies and leadership in the use of latest technologies, including AI, our continued investments in deepening our capabilities in AI, advisory and consulting services and in our go-to-market with a focused effort on wallet share expansion across our existing clients as well as a strong brand as a trusted and reliable market leader. Our sales momentum and revenue visibility remains strong. During the quarter, we signed three new long-term annuity contracts, taking our long-term annuity client tally to 113 from 95 a year ago. New clients for the quarter included a leading quantum computing technology company, which has outsourced their customer education to us, a global clinical research organization serving the biotech and pharmaceutical sectors as well as a global hospitality company. This I mentioned earlier, is an early example of cross-selling of Corporate Learning Group services into [ Sweet Rush ] family of clients. We also expanded the scope of our engagement with one of our -- one of the world's largest professional services firms -- in addition, we completed three renewals that came up for renewal in the previous quarter, two of them leading global pharmaceutical companies and one with a large U.S. bank. Our contract pipeline continues to be strong. The revenue visibility improved to USD 462 million. It was up 19% year-on-year from $388 million a year ago. As far as our guidance is concerned, we've started FY '27 with greater revenue visibility, which gives us a strong foundation heading into the year. We remain watchful of the macro environment and the pace of client decision-making, which can influence timing of new ramp-ups in the near term. In Q1, as I mentioned, we delivered 11.4% growth in constant currency, in line with what we had guided in May. For the full year, we expect the revenue to grow in high single digits. On margins, we delivered 18.3% in Q1 within the framework of -- that we had guided for this quarter. For the full year, we continue to expect an EBITDA margin of 18% to 20%, reflecting continued delivery discipline and phased margin build in [ Sweet Rush ]. For Q2, we expect 9% to 11% year-on-year growth with margins around 18%. With that, Vijay, I wanted to return it back to you.

Well, I think that was quite comprehensive, and I'm sure there are many more questions that we would like to answer. So operator, may I open it up for Q&A, please.

[Operator Instructions] We have first question from the line of Deyan Shanhu from [indiscernible] Managers.

So my first question was the company is investing [indiscernible] -- at what stage they are expecting that this investment will be start contributing meaning to their revenue?

Sorry, do you have another part to your question? I didn't want to interrupt.

Another question was just to confirm that in the commentary, I'm not sure that you speak on this, but the EBITDA margin, the guidance has been same or any changes there...

So on AI, I pointed out that 13% of our revenue came from AI-enabled solutions. And we expect that this percentage will grow over time. The investments that we are making are starting to show significant early promise, and we think that the returns from these investments will start becoming even more material than they are today as we look ahead. In terms of our margin, the margin stood at 18% -- I'm sorry, 18.3%.

Any change in guidance?

Any change in the guidance, We are looking at margins in the 18% to 20% range for the fiscal FY '27...

We have a next question from the line of Bharat Gulati from Dalal & Broacha Stock Broking.

Congrats on the great set of numbers. Just on the uptick that we've seen on Y-o-Y revenues on organic basis, what would have that turned out ex of [ reco ]? And what would have been Q-o-Q organic growth on a CC basis...

So our organic growth quarter-on-quarter would not be affected by the North American real estate client. It would have stayed at 2.9% quarter-on-quarter. On a year-on-year basis, net of the real estate client, our Y-o-Y organic growth would be 5% in constant currency terms.

Just trying to understand that number that we lost the [ reco ] contract and ex of that also, we've grown 5%. So then barring that, the growth should be slightly higher, right? Or how does that play out for us?

So first, I wanted to say we did not lose the real estate contract in North America. The real estate business that we were pursuing by the act of the government of the province of Ontario became deregulated and the education became deregulated and the regulator stopped offering that education. So that's the first thing I wanted to mention. The second thing that I wanted to mention was that the overall growth without -- after netting out the real estate contract from last year would have been approximately 19% in constant currency terms -- 18%, sorry, 18% in constant currency terms.

So 18% Y-o-Y growth in constant currency terms on the overall business, right? But I'm just trying to understand that our organic business has grown 5%, which is including the [ reco ] contract. So what could have been ex of [ reco ] because it should be higher, right? Because we...

Ex of real estate business is 5%.

Okay. Got it. And so then why hasn't been translated out to Q-o-Q growth? Is there any particular ramp down in terms of customers on a Q-o-Q basis? Or what exactly has happened in the organic business on a quarter-on-quarter basis?

Overall...

[ Reco ] was not there in last quarter, [ reco ] is not there in this quarter.

Yes. So the real estate contract has not affected quarter-on-quarter growth. The quarter-on-quarter growth is 2.9%...

Yes. No, I understand that. But that is including our inorganic, right? Or is that just organic growth that we witnessed a 3% quarter-on-quarter growth?

It is overall.

So what would have been just the NIIT's organic business in that 3%, if you can help -- because I understand that [ Sweet Rush ] would have had an acquisition sort of a timing mismatch where some numbers would have come.

They were there previous quarter as well. So both [ MST ] and [ Sweet Rush ] were part of NIIT in the previous quarter. And the quarter-on-quarter growth will be more or less 3%.

Got it. Got it. And just on the margins, so ex of [ Sweet Rush ], what margins would we be at right now? And how do we see these margins ramping up? Should we hit the 20% mark this year? Or is it a little bit of a longer time period where it would take to reach that 20% EBITDA again?

So like I said that we have -- we think that the margin will be somewhere in the 18% to 20% range.

Got it. Got it. And just on the high single-digit guidance for the full year, given that we're growing 3% quarter-on-quarter, do we see some headwinds coming on to this growth going forward? Just trying to understand the sustainability of this growth. How much is -- are we seeing any slowdown in clients in the recent month, which is what Q2? And how are we seeing spends given that revenue visibilities are also up?

So we think that -- I mean, first, we are entering a vacation quarter, especially in Europe. July, August, September is a vacation quarter. So we'll see dampening of quarter-on-quarter growth as we enter Q2. We will see a revival in Q3 and then some flattening as far as Q4 is concerned. So given all of that, we think that we will have high single digit. I think it's mostly seasonal. We think that some of our wins have the opportunity to contribute to accelerating growth. But given the environment and the cautious decision-making that several of our clients are doing, we want to ensure that we talk about it once we are more certain.

Got it. Got it. And just lastly, on capital allocation, given the free cash that we're generating and the net cash on our balance sheet, is there some plan of a buyback that is in place? Or are there further acquisitions being evaluated? Or is there a plan to increase dividend payout to any extent? Yes, that's it.