Subex Limited (532348) Earnings Call Transcript

[Operator Instructions] The next question is from the line of Nagraj Chandrasekar from Laburnum Capital.

You said that 4% of shares are now held by the subtrust. How do these vests? How widely are they shared by the top management? How widely it was wholly dispersed? And what will be the annual addition to this pool going forward? And roughly, what percentage of comp would be -- for top management would be cash versus the sort of stock comp?

Yes. Okay. So the approval that we have sought is to half and roughly it's about 5% of the total outstanding shares. That's what we also provided a guidance, that every year, we can buy 2%. So last year, we bought 2% and this year bought -- we have bought 2%. Now currently, we have covered about 5% of the company, 5% of the companies we have discovered as a part of this focus in allocation, with the management holding about 60% of this allocation. Management and including about the top 15 people of the organization. And vesting is 2 years. That's last year's allocation is vested over a period of 2 years. Similarly, this year, allocation will be vested over a period of 2 years. And this year, allocation, we have also introduced a performance criteria where the vesting will be based on the [ KRAs ] that we achieved. So that is broadly the architecture that we have around this one.

Just one more question, and that's on use of cash. So if you're throwing off INR 40 crore, INR 50 crores a year of free cash flow, and you expect that, that is a sustainable run rate if the existing business is stable, how do you see yourselves using that cash? How much of it would you be dividending or returning to shareholders? How much of it would you just hold as a cash buffer? How much of it would you want to be investing in new initiatives? Could you give some color on that?

So the -- currently, we have -- we are using the part of -- we are allocating this cash around our new initiatives. As you know that, we have 3 key initiatives that we have, IoT security, CrunchMetrics and IDCentral. And IoT security is becoming a mainstream product and as we start scaling it a significant push will be done to step up both the marketing and sales effort, which will start -- which we have already started, but we intend to go to the next year, as we start next year, that is from April onwards. So currently, most all the capital or like the bulk of the capital leads to a path to some other new initiatives. Beyond that, as we start looking at -- I mean might look at bringing in small capabilities to either through small acquisition, that this will be more tuck-in acquisitions to need some of our covered short-term gaps in the portfolio, et cetera, but that's the current plan. But you are right in the sense that we are adding close to INR 8 million, INR 9 million of a -- kind of, let's say, cash in hand on a yearly basis based on the current operation.

And we shouldn't expect any significant portion of that to be returned to shareholders? It's -- we should view it as capital in your hand to do bolt-on acquisitions or any new businesses? Is that fair to say?

So there is no decision taken on that. At this point in time, we are focused on getting the restructuring done, because at this point in time, we do not have any ability to consider any options as long as we have those losses now in our balance sheet. But once some of these restructuring happens, it would be the bandwidth, but what is the best way based on there, we have an organization to deploy this capital adequately.

Just one follow-up question. What is the annual spend on 3 new areas -- initiatives? I saw in the FY '19 annual report, that is roughly around $2 million a year. What would be our current spend rate? And is this expensed or is it capitalized?

So currently, we are not capitalizing anything. So everything is falling into the [indiscernible]. Our current plan is that we would put in either -- or following another 4 million, 4.5 million in 3 new other areas as a part of this thing. Based on the timing aspect, we may not be able to do all of it this year, but the exact details of it, we will provide as we move into next year. Significant addition that we are doing with respect to the sales, particularly in getting the regional coverage done. So we are almost in the process of doubling our sales folks on salespeople particularly on the regions. So that's where the major -- greater activity is going. If you recall, last call, I did mention that we had about 75 people around these new 3 areas, and the expectation was that we were ramping up to about 100. That process is done. And after the end of financial year, we will be pretty much on plan in bringing those salesforce for us to take the sales of this to the next level.

The next question is from the line of V.P. Rajesh from Banayan Capital.

Great set of numbers. Just a quick question. On the license side, could you just give us a little bit more color around the growth in the license bucket? Is it coming from Horizon 1 or coming from Horizon 2 products?

So the current numbers are all -- are predominantly corresponding to the Horizon 1. If you look at -- we had seen -- during the first quarter, we obviously did mention that we are having an overall or some of the strategy for some of the regions, particularly North America and Europe. And we started executing that change in strategy there, which is more focusing on key [ alarms ], which are the largest set of portfolio, that is, as we mentioned about the enterprise business, where we saw that the enterprise business will be a very cumulative, very important aspects for the telcos. The expectation is that, by 2025, they will even constitute about 4% to 6% of the total telco revenue globally. Now in line with that, we had the IPs and the new solutions created to cater to the market, and we started aggressively pursuing that in Tier 1s in those regions. Our data started giving us dividend there. We have started engaging Tier 1 customers and started -- and have started seeing success by winning major deals in some of the biggest telcos. Now this is resulting in new license revenue, along with the implementation and in answer to the earlier -- one of the earlier questions. We are clubbing this together because, at the moment, we say, today, it takes license like if there is a tendency for them to start negotiating that. So we are trying to see a total turnkey solution of licensing innovation put together. But this is primarily what is factored into this financial, is the progress that we have made on some of these markets where we are not performing back when on around other core areas, Raj.

Okay. So the right way to look at is that the Q3 bucket of 29% last year is actually not comparable to 14% of this year because you're adding implementation also this quarter? Or is there like...

No, no. You can see that overall number is like-to-like. A little of that last year, you did have been -- that component was split and contact, but that is no longer relevant because we have started putting that together and taking to the customer. So we can let the more -- overall number is comparable, Rajesh.

Okay. And then my other question is that your employee cost has gone quite a bit down compared to last year. So if you can just comment on that from INR 48 crores, it has come down to INR 45 crores year-over-year.

Yes. So I think it is a function of some of these sales commission and other stuff which we provide on a quarterly basis, Rajesh. So I believe there's very even trends in no specific reason, and no headcount reduction or anything like which has led to the drop in costs. So nothing unusual which you need to read into it.

Yes. Okay. But your employee count went -- is also down by 100 people over the year -- year-over-year, right?

Yes, that's right. But I think that we have been doing gradually has been happening over a period of time. It is not that we have let go people suddenly but this is happening gradually. And there also, I think what we're trying to now is, I think we're also being a little more tactical. We're pleased to say that wherever there are areas where we believe we can get them done by outsourcing or getting some contracting support for certain types of activities to be done. We are kind of trying to use those kind of people who can get work done versus having some time it will be part of the system. So they're also be doing a little more efficient and optimal in managing the operations.

Right. And the other expenses line saw a big jump. And I'm assuming that some of that maybe R&D there. And could it show that it might be helpful if you just break off R&D line because whatever you are doing on the Horizon 2 and Horizon 3, that is all being expensed out. So it might be helpful to just break out the R&D line. But could you just comment on the big jump on your, actually, quarter-to-quarter. From INR 23 crores, it has gone to INR 37-odd crores here afterwards.

So these are, again, there is a few more sensitive numbers are, I think, so what happens is typically in this quarter, we have a user conference which we have in October of each year. So there is a some big event happening there around the companies together. It should be hosted outside of India typically and the rest around it. So we are again very specific, even our marketing expenditure has big jump but nothing to get R&D led to be leading to [ CapEx ].

Okay. And lastly, if I heard you correctly, you said the backlog is 35 million right now. And if you can just share the expectation by the end of the financial year, so that one can understand how it compares to 55 million you had last financial year.

Right. So that's not about negotiating into new business or position. I said that is we are on track to cross that number of 55 million. Now to what extent we will cross that, it could be, 5 million to 7 million, but around that depends on some of the closures that are happening. One of the big ones has been this called travel restrictions that we have on The Asia Pac region because in Asia Pac region, we were doing extremely well. In fact, we have won some very good to Tier 1 before. And we have the follow-up these factors sort of happening at. So that some of the travel restriction is putting some issue, including the concern we were having Mobile World Congress later this month and the last month. It's a modest conference that we have in Barcelona, and obviously, there are lot of the big companies getting pulled out. And this again, is a place -- the place where we have a lot of senior meetings and a lot of covered contracts and negotiation, et cetera. So if we're going to wait and see how this whole thing plays out, how it stands today, we should still be on track to cross that 55 million. To what extent do they close? Then my expectation is about $5 million to $7 million, but again we've got to get the financing on this whole new situation which we are closely tracking, Rajesh.

The next question is from the line of Sanjay Shah from TSA Securities.

Sir, can you draw us a road path towards our growth trajectory in Horizon 3? And even in Horizon 2, I would like to understand the inroads into Africa and Middle East market. Can you draw us some light on that?

Okay. All right. To start with, let me start with Horizon 2, which kind of an IoT security. In IoT security, as I said, we are working predominantly with partners as the go-to-market because the market is so huge that not be practically possible for us to cover directly. Now we are getting partners which are global in nature. Now these partners are the large telecom companies, larger cell companies, larger [indiscernible] on the consulting companies like KPMG, [indiscernible] et cetera. So we are in various stages of onboarding these platforms. And directly, we have picked up certain verticals like autonomous car, manufacturing, smartcity and these as for focus areas for us. So the go-to-market for even some of the countries like Africa and Middle East, by and large, will be through these partners. There are 5 of them that [indiscernible] with just telcos, larger price on the -- and consulting companies. The third one being large OEMs, then resellers, large retailers and last one being governmental. In governmental, we are focused on 2 countries, one in Africa and one in -- another one is India. These are the 2 countries that we are focused on. For the government, we tend to place a lot of [indiscernible]. The opportunities are very large [indiscernible] et cetera. On Horizon 3, it is -- we have 2 products now: CrunchMetrics, the [ economic introduction ]; and CrunchMetrics, we are focused on 2 verticals other than telcos. One is e-commerce, another one is fintech. E-commerce, as I said, we got the first customer on board. And fintech also, we have started taking that market -- that product at definitely the market. And so these are kind of low-tech selling. It is a fast-paced offering. So we are building the capability to have a DIY, that is do-it-yourself model. So beyond the first few customers, our expectation is that people will be able to -- customers will be able to come out through the website, download, test. And we are expecting that the flywheel effect will start with an inbound batch. IDCentral, we have obtained much more initial space at this point of time. These are onboarding customers and the customers and data aggregators onto a platform, starting with Indonesia, and we were -- only once we get a good amount of partners and customers onboard, we will launch it in other markets. So that's a quick summary of that, the 3 new initiatives.

[Operator Instructions] The next question is from the line of [ G. Daniyal ] from Entropy Advisors.

You had said that you will be most likely ending the year with an order book of around $60 million, right?

Broadly in that range, [ Daniyal ], but I just had explained the concerns that I have on some of the market dynamics, particularly in the cost of [ capital ] restrictions.

Yes. So this order book relates to license implementation and customization, right? Doesn't cover manager services and portfolio services.

The existing annuity and existing management [indiscernible].

So that it relates to 40% of the sales?

Sorry. I didn't understand. What do you mean by 40% of sales?

Because management -- managed services, 29%, and the support services, around 31%. So that's 60%, which is annuity in nature.

Yes, yes. That is correct.

So the INR 420-odd crores of order book relates to -- is an impact, 40% of sales?

That is correct, but some of these things are -- these are new managed services deals are also a part of it, right? So the existing managed services expand, but these are new business. So if you're not that all the $60 million that we booked or $55 million or $60 million that we booked as coming in 1 quarter. It comes over multiple quarters. So you are right in the sense of, by and large, the decision to launch license and implementation and uplift that we can get on managers.

Okay. And this will be executable in what period? I mean, the [ 6 ] overall?

Yes. By and large, other contracts for about [ 3 ] years on an average.

[Operator Instructions] The next question is from the line of [ Mahir Gupta ] from Subex Limited.

Yes. My question is related to IoT security. You have set up 1 smartcity project in U.S., in collaboration with one of the town. So what are the other -- or what are the other responses you are getting after that implementation in U.S. and Europe?

Okay. So we have that positive -- we are one of the most referenceable product and customers that we have across any product line. It's been extremely successful thing. Having said that, it is important for us to get registered with the government, that is the U.S. government, for us to catch massive projects. We are in the process of enrolling ourselves to the government, that is that process. And as we have an Indian parent company, it goes to a separate [indiscernible] altogether or validation, et cetera. So we are in that process. So we'll have to wait for that for us to get significant advantage from this thing and finish to other smartcities in the U.S. On Europe, we are going to the partners. So our current focus is to enable the partner, for example, it took almost 1 year for us to enable Telefónica as a partner after having or after them selecting us. But at this point in time, they are able to take us to many customers without our involvement. So in Europe, we are trying to work with some of these partners. We do not have any deal last year, but some of our partners are started targeting more smartcities in this area [indiscernible].

In previous conference call, you mentioned that you will declare some of the deals after getting the clearance from the customers. But I have not seen any announcement after that conference call on exchanges pertaining to the -- due to the [ devaluation ] in the conference call.

Correct. So now I -- so we have definitely won some very, very key deals, but now we have to get the approval from both the final customer and partners also, and it is taking time. I'm hoping that during the next -- this current quarter, we will get some approvals, but we will have to wait till we get the bigger, large customers and very large customers. Because please understand that we are currently targeting large customers. We have more than 100,000 IoT devices. And it's not that easy to get the marketing underneath of the clearing customer endorsements and new endorsements. So it is taking time, unlike some of our telco customers where we have direct control over that.

And what is the traction in India for smartcity security, particular pertaining to IoT security?

Yes. So in India, we have started working. And there are several smartcities, but unfortunately, the whole security was given as an optional item in the phase 1. Mainly maybe, let's say, stage, which have got the first stage implemented. They have started looking at securities. And my belief is that by 2022, a lot of capital -- on the capital allocation is going into securities from [indiscernible], and we should see some projects towards the third quarter. The third quarter we'll call the calendar quarter, that is towards the end of 2020, we should see some of the projects coming up, but the capital allocation is just sort of happened.

And for Digital Trust, how many POCs do you have done until now?

Well, so Digital Trust is overall umbrella under which we have all these products. So Digital Trust by itself is quite -- there is nothing of a Digital Trust solution. But the Digital Trust can be broken into components like digital identity, digital privacy, digital security, digital risk mitigation, digital insights and confidence in data. And the [ result that ] with onestops, managing all these components, it will all come together to provide them Digital Trust that is required for the business system more products. So we already elaborated on some of the progress that we are making under those events. So the area or the domain that we work in Digital Trust. But the solutions are the some of the solutions that we already get.

But if there are missing gaps in this umbrella, are you going to do organically, or you are going to fill those jobs inorganically?

Then we will start with partnering wherever it is required. Now particularly when we are looking at discussing or mentioned about solutions that we putting together, our engagements that we are doing from the governmental side. If the government, and obviously, they are looking at engine, and therefore, there are capabilities deployed there. And there we are partnering at this point in time, because our focus is in some of the areas that we mentioned because that is where we are putting the money on. At this point of time, we do not have an ability to take on more products as we want to focus on scaling these areas. And we are sort of plugging those gaps with partnerships, some tactical, some strategic.

And for digital risk part, are you going to tie up with some insurance companies?

Digital risk is not yet [ in insurance company ]. Digital risk, we are looking at solving with a technology solution. Some, we are leveraging some of the aspects that we already know. We are putting whatever we already know because we manage risk in one of the complex in telcos so we are moving in that. We are also leveraging the different models, leveraging AI model, take you to some of the new areas like fintech and office.

Ladies and gentlemen, we'll be taking the last question. That is from the line of Mr. Raj Kumar Ojha, an individual investor.

My question is, you had soft-launched IDCentral in unit sales. Has it been hard-launched yet? This is question #1. My second question is, now that you have in the balance sheet and this structure, now can we look forward for a dividend in FY '21? And you had also said in the last con call, that CrunchMetrics, you have put it on cloud, so that POCs can be done by clients themselves. Can you tell us how many clients opted for that option?

So on the first question, on IDCentral, we have not hard-launched it because, as we mentioned, the data regulation getting rolled out in various geographies. We have not been able to -- there has been a delay on-boarding some of the telcos onto the platform, and that is taking more time than we originally expected. And so we have to wait until some of the telcos come on board to launch it to the other regions. But in any case, we are looking at the one case we are going to market to market in the first product. But currently, we are starting for customers to come on board from that market of Indonesia and Thailand. And once we get to at some stage, we will look at which other markets to open. On the second question of the cloud-enabled technology [indiscernible] just add some to the last one. I'll ask him to answer that. But on the concept is cloud-enabling, we are enabled to sell cloud. Now back in DIY, do-it-yourself thing, we are expecting that in the first few customers. We are -- have ourselves requesting them to engage us, so that we can learn more about some of the aspects, and we are having more, in fact, both the POCs that we have done on new areas have been significant learning opportunity to us. So while we are making it easy because we are targeting in the cloud, et cetera, because I think is easy to implemented, but we are engaged in the first few things. We want to be engaged so that we can learn and see what a modification should be done on the product.

On the dividend, I think as we explained, I think the regulatory process of approvals, which should have been taken us somewhere until September of FY '21. So we love to launch [indiscernible] the computed only, the actual theme of the accumulated losses will get completed in the financial. And thereafter, the Board will look at the financial portion of the company and then they consider dividend as appropriate. So at this point in time...

I was talking only in terms of probability.

Yes. Yes, there is a probability. And once the approvals come through, after the Board will consider as the situation unfolds.

Sir, my question to Vinod Kumar, sir, is, has Subex any new product launch plan in the additive of their portfolio?

Not at this point in time. We have some other new projects that we are putting in at the R&D. It has a part of the R&D process. But at this point in time, we are on our handset for these products, and we wanted to scale this on. And on the -- we have a focus around scaling these particular [indiscernible].

Ladies and gentlemen, that is the last question. I now hand the conference over to the management for the closing comments.

Okay. So if you recall, what we have been doing is executing at executing on a strategy and the detailed plan behind that. We have communicated to the -- we were starting move up on the mid of last year results in some of these large equity base, et cetera. We are working towards addressing it, and we have seen that -- the details of that. And also, on other aspects of this Digital Trust executing, we are going as per our plan. And we believe that this will translate into higher growth in the revenue terms and also higher -- in the whole, the overall company. The value of the company will be significantly increased from some of these activities. Now also considering the ongoing capital restructuring and the focus to grow in the areas of business, we are also relooking at our investor investment, including the current cadence of quarterly investor call. So we will let you know once we have shown that for the next result. And as and when, as Venky mentioned, as and when we have more information to share on this restructuring, we will keep you posted. With that, thanks again for attending this call and for your support for us to move forward. Thank you very much.

Thank you. Ladies and gentlemen, on behalf of Subex Limited, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines. Thank you.

Farewell.