Subex Limited (532348) Earnings Call Transcript

Thank you very much. Good evening to everyone who have joined the earnings call for the period ended September 30, 2020. Now I'd like to introduce the members of the management who are present for the call. Along with me, I have Mr. Vinod Kumar, Managing Director and CEO; and Mr. Venkatraman G.S., Chief Financial Officer of the company. I would like to start the conference call by going through the safe harbor clause. Certain statements in this call concerning our future growth prospects are forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. The risks and uncertainties relating to these statements include, but are not limited to fluctuations in earnings, our ability to successfully integrate acquisitions, competition in our areas of business, client concentration, liability for damages in our contracts, withdrawal of tax incentives, political instability, unauthorized use of intellectual property and general economic conditions affecting our industry. So with this, now I hand over the call to Mr. Vinod Kumar to take it forward. Thank you.

Thank you, Krishnakath. Good evening, everyone. Wonderful to have you all in the call today and hope that you and your family are safe and in sound health. We continue to be in a challenging period with COVID infections rate going up again in several geographies that we operate. It's very satisfying for me to inform you that, at this point, all Subexians are sound and safe. About 25 Subexians in various geographies were tested positive for COVID. Most have completely recovered and the rest are at their homes and getting better. Now despite the challenges, we had, had a good second quarter in terms of our financial performance. The revenue for FY '21 quarter 2 was at INR 933 million as against INR 857 million of Q2 of last year, which translates to a growth of about 9%. Our EBITDA increased by 23% and ended at INR 254 million as against INR 207 million during the same period. Our profit after tax was at INR 123 million as against INR 63 million in quarter 2 of FY '20. The capital reduction exercise that we embarked post approval of our Board and shareholders have also been completed, with the relisting of our shares with face value of INR 5 last week. It was a very elaborate and complex process, and we are very glad that we have been able to complete it ahead of the time line that we had originally estimated. From an operations perspective, bulk of our teams are working remotely. Our managed services and the support operations are progressing quite well. However, on the project delivery, we are seeing delays on account of challenges of remote working with customer teams, particularly when we have to integrate with multiple system within customer environment. As you can appreciate, project deliveries used to happen with a substantial on-site presence, and in many customer environment, we do not have the detailed documentation of internal processes and systems. So getting all these things remotely is time consuming and contributing to the overall delays in project deliveries. It will take a while for both sites to get accustomed to the new model of working. We are making progress, but definitely there's a lot more effort and challenges in getting this done on a remote basis. On the business acquisition front, we are seeing telcos tightening their purse, particularly after the end of last quarter, and postponing some of the projects, again, most specific in North American and European markets. The priority from our customers seem to be streamlining their existing operations to adjust to the remote working of both their teams and even their customers. So overall, there is also an effort to look at cost reduction. And towards this, they are exploring rationalization of multiple systems and things like that. However, the long-term investment and exploration on 5G IoT are progressing, although with some reduced speed, but I guess that they have retained their commitment -- most of the telcos have retained their commitment to some of these investments as a long-term basis, obviously, with some reprioritization based on the supply chain and some of their cash flow considerations. On the IoT OT security side, we are seeing resumption of some of the discussions that has been tied up earlier this year. I mean I'm talking about the -- after the March, we had a lot of these projects put on hold because they were on other priorities, the factories were on shut and whatnot. So most of those -- the good thing is that most of those discussions have started resuming. Now we are closely monitoring the situation and making [ various ] investments to our operating plans, aligning with where the customer is spending and also making the changes wherever the delivery model demands that. Our focus continues to be on the digital trust. As some of you would have seen, we have augmented our management bandwidth by bringing in Suresh Chintada as our new CTO, and he will spearhead the effort to enhance our digital trust portfolio. To start with, we are establishing a digital trust lab, and this lab will look at new technologies like post quantum lithography, homomorphic encryption, which will be key technologies and very relevant in the coming days when we talk about security. And also that our trust-based technologies, like blockchain, which is, again, something which we have already started working on, but we wanted to really fast track that under the ambit of this lab. The idea here is to work with a lot more partners, academia and customers to look at use cases that are relevant for their emerging digital world, with specific focus on a wider 5G and IoT adoption. Now this remote working is going to be a part of the new normal. And towards this, we are taking adequate steps in training, knowledge management and data security to fully embrace this change. We believe that even post this pandemic, some of the advantages that we have with respect to work from home, it is good to sustain it. It is not going to be like what we have today with complete work from home, but it would be kind of a mixed model, and therefore, how to enable that is something which we are looking at. And we have started working ahead of it. And to look at what are some of the changes that need to happen in the system side, in the training side and on the IT side so that we can completely embrace that. We will also be increasing our investments in the training of selections. We have already undertaken that, and we're continuing that. And as we believe that it will be necessary to navigate and grow our company out of that. As you can appreciate, the lack of socializing and challenges of virtual collaboration is quite tiring. We are trying our best to engage the teams and keep their spirits high. I'm sincerely hoping that we can see the end of pandemic soon and get our teams together and also be in front of our customers. And yesterday, the news about the vaccine is quite encouraging. And hopefully, by quarter 4, we could, at least, have a better interaction with the customers, at least to start visiting them. Today, most of the customers, even if we are willing to visit most of them, do not entertain them because of the considerations and some of the policies they have. So we are hoping that the quarter 1 of next year, some of these things will relax. And also because of the renewed confidence, some of the -- they will start to aggressively looking at some of the products which have taken a back seat because of some of these adjustments they are doing to their operating plan. So until then, we have to be agile and manage the situation as it evolves. That's what we are doing currently. So the continued support of our shareholders means a lot to us, and we thank you for all the confidence that you have reposed in us. Thank you very much, and probably we can take some questions now.

[Operator Instructions] The first question is from the line of Amit Mishra, an individual investor.

Hello. Can you hear me now?

Yes.

Yes. Firstly, congratulations to full management team on completion of share capital reduction. Good set of numbers and business momentum as we have seen in Q2 presentation and recent press releases. So I have 3 questions here. Firstly, it relates to the recent deals, which we came to know through press releases, which I mentioned earlier. So can you take us through them, the one with Telefonica and Tech Mahindra? Specifically, I'm looking for nature and size of deals we are looking at. Also when these deals can fructify in terms of revenue recognition? My understanding with Tech Mahindra deal is that you are going to put [ 2 bit layer ] in their products with telcos around the world. So is there something going to be bundled automatically in their product? Or Tech Mahindra needs to pitch this additional layer to [ its clients ] before it's getting implemented? So that's my first question.

Okay. Let me answer that. I thought that you have 3 questions. So let me first answer that question. So thank you. Now this deal is on a partnership that we have signed with Tech Mahindra. I'll first cover that and then go to Telefonica. Now we have decided to cooperate in the area of blockchain. We have identified specific use cases around blockchain that fits well with our digital trust in the digital trust domain. These are areas with respect to the settlement, with respect to some of the fraud management-related aspects. And these are the 2 areas where we will be participating to start with, with these use cases. Of course, Tech Mahindra has got a platform, and we would be covering use cases around the digital trust areas with our blockchain solutions. Now how will be taken to the market? We are jointly taking that solutions to the market, and we are quite bullish about it. Obviously, these are new areas where the customers are kind of embracing as they move into the new -- particularly when they start moving into the enterprise side of business. I'm talking about telco customers. That is where we are hoping that most of this engagement will translate into revenue. So I'm not able to give you a size of the deal, et cetera, at this point in time, but we are very, very happy with the progress that we are making with the integration that we have -- we are doing with their platforms, and how we have agreed to jointly take that to the market. The story is slightly different when it comes to Telefonica. Telefonica, the engagement is specific to IoT security, where we have been selected as their partner to provide IoT security to their customers. So they have created a security offering. I mean, they have a large security business under the ambit of Telefonica Tech. They do close to INR 1 billion business around Telefonica Tech. And they did not have an IoT specific security practice, so they created that practice underpinning our technology. And they have carried -- they have started carrying that to the market. So both these things are strategic in nature, and we expect that, in the months to come, we will have some joint successes that we can talk about it.

Great. Can I ask my second question? Hello?

Yes, go ahead. Go ahead.

Yes. So the new areas that we discussed during our opening speech, Vinod, it's something that we discussed before as well in previous engagements. Can you please throw some light on these labs, on some progress in this area and how much the company is investing in this? And employees, total number of employees working for these labs. That's my second question. If you want, I can...

Go ahead and ask the third question on it, and I can take that together.

So yes, on the sheer capital reduction, that's massive for all of shareholders of the company. And we have been waiting patiently for the last 3, 4 years because that has been a big commitment from company [ where that ] it never realized all the time. So besides the stated objective in the presentations like share capital being commenced related to the business side in key ratios and allowing company to pay dividends to shareholders. What is the next [ estate ] to -- because we still have a large number of tiers INR 56 crores. And it's quite a big number for a company of our size. So that's my third question if you can reflect on that. We have good cash balance, if you are considering buyback or something like that?

Okay. So first on the Digital Trust labs. So I think this is something a completely new thing, which we have thought through now. And probably you are confusing that with the AI labs that we have been having for quite a while. Now AI Labs is -- I mean that's an integral part of our operations for quite a while. We sort of give a lot of emphasis to it, and that is providing a lot of cutting-edge capabilities to our products. So that's what we have been -- we probably in the past calls that we're talking about. The digital trust lab is something which we are setting up. As we talk now, we are just putting our plans together. And that this is primarily looking forward on new technologies and things like that. So this is something new. So that's -- we will elaborate as we come up with more -- we have better -- we have completely thought through that. At this point in time, we are looking at -- we have a CTO -- this is getting incubated under CTO's organization. Coming back to the second part of the question, I think that we have rightsized the capital, et cetera. Our current focus is to look at how we can invest around of our new areas because, as you can appreciate that this year has been quite a tough one for us as some of the things that we want to do on the market side, for some of these new products we could not do it because of the particular situation. So the company's focus will be to look at the new green shoots and look at how we can support that fully, based on our ability to do that much more than what we used to do before. So that's our priority. With respect to -- of course, with this capital reduction and this, let's say, balance sheet [ restructuring ] we have done, we do have an ability to look at other options, but that is not something which we have considered at this point in time or -- and as and when the timing is right, we will reflect on that. And once the Board takes a decision, we will let you know. But our current focus solely is on looking at all the new areas that we have identified and how to support and how to support them with all that is required: capital, talent, technology, partnerships so that we can stay ahead of the next stage. That's our focus on it.

[Operator Instructions] The next question is from the line of Sanjay from Alphaline Wealth Advisors.

Yes. Good afternoon. Congratulations on good numbers and wish you good health as well. So my 2 questions. The first was related to the blockchain new partnerships we have done with Tech Mahindra, we are very bullish. Can you elaborate, have we done any testing on that or how capable we are to do that or it's still in an incubation stage at -- of a digital trust lab?

Okay. So we have been working on this blockchain based -- on some of the specific use cases that mentioned in the earlier answer to the analyst call on the fraud and partner management for quite a while. We have done a few [ of those ] with our customers. We do not have any deployment as yet, but we have done POCs with a Tier 1 customer. So to that extent, we are in the MVP stage, a minimum viable product stage. And what we intend to do is that we would want to take it now aggressively with this partnership to our customers, broaden the base because I -- as you can appreciate that Tech Mahindra would be looking at a much wider spectrum than the narrow spectrum of digital trust that we are looking. But this is not that we are -- this is not in the incubation stage. It is at an MVP stage. A minimum viable product has been created. And if today, a customer wants to do a POC, we are in a position where POC are a pilot. So that's the state where we are at on the blockchain, specifically on the use cases. Under the orbit of the digital trust labs, what we are trying to do is that we are taking more use cases because we are focused on 2 use cases now, settlement and fraud, but there are several use cases around this whole area of digital trust, which we can put use of this technology. And those are the things that we will explore under this ambit of this digital trust lab.

That's great. So my second question is, we have addition in our ESP portfolio, that is partner ecosystem management. Can you elaborate on that what are we doing there? And what is the opportunity lying [ in that space ]?

Okay. So the partner ecosystem management is a solution that will help our telco customers to start with. It can be extended to other vertical also, but any, let's say, enterprise like a telco customer to manage their set of partners. As you can appreciate, already with the 4G, there is a lot of partners that telcos work with. So if you look at any of the customers in the Indian contract, any of our operators, they are now bundling and giving Netflix, Amazon Prime and whatnot, right? So these are all partners. There are large partners, there are small partners, there are [ continental ] business, there's plenty of them. Now if you move into the 5G scenario, they will have the additional partners would be in the tune of times. I mean we are talking about 10 to 20x at a minimum to start with the partners [ we are ] doing, partners where is going to add. So they need a robust system for -- to manage this partner end-to-end. That is starting with [ credit ], getting the partners, onboarding the partners and creating the ability for our partners to co-create portfolio together. So they need a system to do all these things and which is nonexistent for the telco space at this point in time. So we have been working in the space of interconnect billing for a long time. And that's a natural transition for us to scale up from whatever we have been doing, and look at this overall aspect of partner management, which will be very, very critical for telcos and many other partners. We are starting with telcos, but this will be applicable to any organization that has got a lot of partners to management, starting with onboarding, creation of portfolio, management of the portfolio, settlement at the end of the cash flow management, the payment management onboarding, offboarding, all of them we are creating a platform, and that's what the partner management is. So we are quite bullish and quite excited with the progress that we are making there.

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

And congratulations, Vinod and GV, that's a fantastic set of numbers. Just wanted to know what's the pipeline looking like for the Horizon 2 products?

Okay. So thank you, Rajesh. With respect to the Horizon 2 and Horizon 2 products, as I told -- as I've told you during the last call, it was quite kind of a difficult period, the first 2 quarters, particularly on account of most of the projects have been put on hold because all the new projects have been put on hold by the customers, not just telcos, but even industrials and things like that. We have started seeing resumption of that, some of the things that we have been selected and has been put on hold, some of the things which they had an RFP put on hold. We are seeing slowly things started that those engagements sort of coming back, Rajesh. So we believe that during the course of this quarter, some of those engagements should move forward. And we should be able to probably come back to you with some good details around some of the specific progress, or let's say, the deployment that we are doing during the course of this quarter, Rajesh. So quite encouraging to see the reengagement from some of these customers who put their projects on hold went with the advent of COVID in the March, April time frame, Rajesh.

I see. And maybe just a housekeeping question. So our goodwill of, I think, INR [ 34 ] crores or thereabouts, that's going to be now static? Or will that get further reduced given the capital reduction exercise?

Again, sorry, I missed it, what, INR 34 crores Rajesh?

Sorry, about INR 34 crores, the basis that we are showing on the books INR [ 34 ] crores. That will now remain sale or because of this capital reduction, which will go down further. I don't know whether your capital reduction process got completed by September 30 or not. So that's why I was just trying to understand.

That's been completed. So the accounting entries for the capital reduction have been through the September quarter. So there's no further change, which you're seeing will remain and that anyway since we had taken that impairment in December, so that is a reflection of what we see the goodwill as given our current projections for the business.

The next question is from the line of Amish Kanani from JM Financial Services.

Congrats on a really good set of numbers. Sir, two questions from my side. One is, sir, we understand that, in Q1, you had alluded to some savings that happened, because of which there was a good -- despite a slightly lower revenue, we had a good EBITDA margin. So this quarter, there is some decline there vis-a-vis Q-o-Q in the margin terms. The question is, sir, and I understand that Q4, for us, is a relatively big quarter given some licensing income that we get. So I just wanted to understand, from a cost perspective, how are the costs moving? And in that context, how should we look at second half margin? I know we don't guide, but directionally, how should we look at it?

Yes. So, Amish, I think from a cost perspective, 1 big cost item, which has not been there in the current year of both quarters, Q1 and Q2 is travel spend. That is a reasonable component of our spend and given, obviously, COVID, the travel spend are not happen. That has obviously helped us. We compare between Q-o-Q, I think even last quarter and this quarter, because we have a ForEx loss. In last quarter, we had a ForEx gain of about INR 1.89 crores at a consol level versus we have a loss of INR 4.38 crores this time. So that's why there is a movement at the operating margin level. And that is primarily because of the movement between GBP dollar and rupee dollar. So that has led to the margins coming down a little bit. But apart from that, operationally, our costs have been in line, and we have not had any major changes. And as for the rest of the year, as you rightly mentioned, we don't guide from a margin perspective, but we don't see any significant changes to our cost structure. But yes, there will be increments, which will kick in, in the second half of the year because given the general uptick in demand for good people, we will need to give increments to our people. So therefore, to that extent, there could be increase in our cost. But apart from the operation cost, we don't see any significant changes.

And we can expect that Q4 seasonal upturn in terms of licensing income that we should continue to assume to be in the trend line?

So I mean that -- I mean, that is a function of the deals we close, right? So typically, the license revenue, which we book, is a function of the deals we closed in that quarter or the previous quarter. And the kind of contracts we have with customers because some of them are such contracts where the whole implementation is linked to multiple deliverables. In such cases, then the license revenue also gets recognized over the duration of the contract. But there are some where there are very specific deliverables which we can deliver to the customer, which is -- which helps us in recognizing the license revenue upfront. So it's difficult to call that out right now. While historically, we have had better fourth quarters, as you rightly mentioned. But, to me, to call it out now will be difficult because it's a function of the kind of deals we close and how those contracts are structured.

Okay. Okay. And second question, sir, I wanted to understand the taxation part. I saw 2 items under tax. So we don't pay tax probably because we used to take a digital -- the goodwill write-off. But we have these withholding taxes plus deferred tax. So how do we -- and as a result, we have both the tax put together, we pay 40%, 45% that is we provide for, of course, I would say, on the tax side. So if you can just help us understand what are these 2 items? And having written off the goodwill, are we changing those things? And how should we look at the tax rate in future?

Yes. So I think the tax numbers, which you see here, particularly withholding, is a function of the -- because Subex operates in almost 90 countries, we have provided services to customers in 90 different countries. And many of these countries, we don't necessarily have a operating company in each of these countries because it's anyway not really required. So in geographies where we don't have a physical presence, in those countries, each of these customers deduct withholding taxes based on the regulations in these specific countries. So therefore, that -- the withholding tax line item which you see is deductions made by customers for payments, which they make towards from these geographies. So that will -- so that is the cost of doing business in these countries because the cost of setting up an entity and then running that will be even more expensive for us. So that's one aspect. So far as the deferred tax line item, if you see, that's -- as you already said, there's not a cash charge. It's a function of the mismatch between my tax books and the benefits, which we will get over a period of time because of the restructuring, which we did 3 years ago because we have had this LLP structure, where there are tax benefits available to us. So that mismatch has to be in line. So therefore, we have these deferred tax liabilities which we have created. So given the structure which we have, this will continue. Unless we do something significantly with our structure, these line items you will continue to see going forward as well.

The next question is from the line of Kranthi Bathini from WealthMills Securities.

Congratulations for a good set of numbers. Just want to know, you are -- India is a very key significant market for the telecom business. But whereas if we see the geography-wise revenue with respect to Subex is concerned, it's not improving. Is there any specific reason? And also what are the plans to improve the business domestically?

Okay. Look, traditionally, if you look at our product, our portfolio, we cater primarily to the telecom operators, the major telecom operators, and we provide them solutions on specific areas. If you look at the Indian market, most of the operators are our customers for our range of products. And once we have on products, the way we have our business is that, we have an ongoing business on supporting them, that is the annual maintenance and then the change request and the upgrade and things like that. So if you look at the world over, I mean, definitely, whenever there is a new opportunity there, as a new operator coming on board, we have had that increase in this thing. We are seeing, on the other hand, there are consolidation happening. We do not expect that margin of Indian business, as a percentage of our overall business, to go up in the short term because most of the activities around 5G and some of the enterprise movement are happening in the Western geographies, and that's where we are focused for our -- some of our new products. But we expect that the amount of business to remain particularly stable. Obviously, when, let us say, the 5G gets rolled out and things like that, there will be an opportunity for us to go back to our products. So it's not that we are not focused on this market, but the opportunities, for us, on some of these new areas are presenting much more in other geographies like Europe and EMEA as a whole and North America and those regions.

Okay. How do you foresee the opportunities with respect to India, which has so much [ pack ] of growth with respect to geo and the other telecom operators. And India is one of the few markets in terms of the telecom lines are -- as far as telecom price is concerned?

So that might be from a number of customers' perspective, that might be. But I guess that, as I told you, we have already provided our solutions to them. And the next wave will happen when there is a technology change that happens or we come with a new product, like, for example, once we -- when -- once the Indian operator starts exploring the enterprise business, then definitely, that will be an opportunity for us to go and sell our new products. So I guess that the 5G, when the 5G and those things get rolled out, that is when probably we will have more business coming out from the Indian market, Indian operators, let me put it that way. But otherwise, for our existing -- our current thing, the revenue will remain at the current levels.

[Operator Instructions] The next question is from the line of [ Ramesh Kaspeka ], an investor.

Yes. Mr. Vinod Kumar and your team. Congratulations on a good set of numbers. Now basically, then -- I'm an accountant. So I don't understand much of the IT strategy and the technicalities and the details, which you explained. But, basically, when I look at your numbers, it looks to me that your turnover, or the income, has gone up by about INR 18 crores in 6 months' time, and EBITDA has gone up by about INR 25 crores. This is as a result of contraction in expenses by INR 15 crores in other expenses, which, if you net off, which your employee cost increase of INR 5 crores, gives you a net expense reduction of INR 10 crores. The balance, I would like to know, out of that turnover of INR 18 crore increase, is it pricing power? Or is it new businesses? What I mean by new businesses is, is new clients, new products and things like that. Or it is just pricing power to the existing customers, you have a monopoly once. You sign up for a security contract, people can't just go away, as I understand. So is it -- how much of this is pricing power? And how much of it is the new products or new businesses?

So there is no pricing power that we have. It doesn't exist in the market. We play in very mature markets. That being said, once we are in a customer, we will be there at least for 10 to 15 years because the -- it's not that easy for us to swap a customer to swap us out, because we are very well integrated on that. So the revenue increase that happens is primarily because we are providing more services, either if we sign more projects or more projects to new customers. And it's primarily new business. I have more -- from existing customers or new customers, that's a mix of that. I would say that about 75% of our business comes from our existing customers, new business from our existing customers, and about 20%, 25% will be new logos put together. The cost, as Venky clarified, this year, we had a -- because of the COVID, the travel line item of the expense have been very low, and that is coming into the numbers. But otherwise, from a -- costs have primarily or more or less been in line with what we normally have.

Yes. The other question is you have an add-up of about 100 numbers in headcount, which, in this quarter, has resulted maybe in INR 5 crore [ extra ] increase. And annualized should result into maybe INR 13 crores to INR 14 crores. Now is this for new products and new businesses? Or is it for sustaining the existing operation?

So it is for the -- it's a mixture. We have added some delivery capacity. If you see our numbers also, the delivery component of our business is going up, and therefore, we increased the capacity, our delivery capacity. We increased it to drive more revenue. So that's point #1. Some part of it has gone into new areas and the new initiatives. And we have also onboarded a few [ refreshers ] so that, on an ongoing basis, we take them, retrain them and that is probably will be used to, let's say, backfill some of the attrition that we have during the year. So it's a combination of that. So you're right in the sense that we have increased delivery capacity to drive more value.

So ideally should result into a better business?

That's correct. Yes.

The next question is from the line of [ Deepak Sukhani ], an individual investor.

Hello, sir. We saw that you have a pretty decent cash balance of around INR 140 crores, which is going to increase every quarter. So what's the plan and the strategy to utilize that? I mean, as one of the gentlemen asked, will there be any planned buyback? Will you start giving dividends? Are you planning for any acquisitions? Because I believe, by the end of the year, this INR 140 crores will become INR 200 crores, and will keep going up. So what's the management plan regarding that?

Yes. So as I clarified on that, our current focus is on growth, and we will use the capital for fueling growth. All options are being explored. Obviously, as you can appreciate, we have held back on some of the investments because of the situation -- market situation that we are in. We are slowly bringing those investments up in the new areas. And we are also looking at primarily from when we look at digital trust and for us to plug, or plug the holes in the digital trust portfolio or augmented things. We are also looking at what is the right technology partnership that we should do. So primarily, our current focus is to use those capital to drive our growth. No other decisions have been made at this point, not even -- no other considerations have been done because we've just completed the whole restructuring exercise. And as I said, our current focus is in a singular focus of driving revenue with all the resources that we have.

The next question is from the line of [ Shreyas ] from [ Dura ] Technologies.