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Q1 2021 Sonata Software Ltd Earnings Call

Aug 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Sonata Software Ltd earnings conference call or presentation Tuesday, August 11, 2020 at 5:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jagannathan Chakravarthi Narasimhan

Sonata Software Limited - CFO

* Palem Srikar Reddy

Sonata Software Limited - CEO, MD & Executive Director

* Sujit Mohanty

Sonata Software Limited - Head of Sonata India Business

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Conference Call Participants

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* Amit Chandra

HDFC Securities Limited, Research Division - IT Analyst

* Baidik Sarkar

Unifi Capital Pvt. Ltd. - Research Portfolio Manager

* Devang Bhatt

ICICIdirect.com, Research Division - Research Analyst

* Jay Daniel

* Madhu Babu

Centrum Broking Limited, Research Division - Research Analyst

* Mohit Jain

Anand Rathi Financial Services Limited, Research Division - Analyst, Technology

* Rajeev Agarwal

* Ronak Vora

* Sarvesh Gupta

Maximal Capital - Founder

* Siddharth Rajpurohit

JHP Securities (P) Ltd., Research Division - Research Analyst

* Vipul Shah

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Q1 FY '21 Earnings Conference Call of Sonata Software Limited. (Operator Instructions) Please note, this conference is being recorded.

I now hand the conference over to Mr. Srikar Reddy, Managing Director and Chief Executive Officer, Sonata Software Limited. Thank you, and over to you, sir.

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Palem Srikar Reddy, Sonata Software Limited - CEO, MD & Executive Director [2]

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Thank you, Vikram, and good morning, everybody, and welcome to the analyst call. First, the announcement of our Q1 results FY '21 yesterday.

So when we met about 3 months ago, I think everybody were going through very, very uncertain times, both from a human perspective and obviously impact on business. And in our commentary, then I think, we had mentioned the facts of the situation as they were unfolding in terms of what had happened and what do we think will happen, what is likely to happen, what will we do? And most -- and a lot of things were still fluid, though we did obviously give some estimates about drop in revenues, drop in estimated profits for the quarter, but fairly uncertain how different industries will behave, how different customers will behave, what's going to exactly transpire and how things will shape up kind of stuff.

So I think -- as we stand today and speak today, I think the good news is that things for us have turned out to be better than what we thought they will be, both from the quarterly performance, but actually really I think what the company did in the quarter to actually deal with the situation and be able to grow out its business in a meaningful fashion. So while the revenues, we had estimated it could be anything between 18% to 20% down, maybe they're a little bit more down also because some -- we might not have started -- restarted some projects on time and there has been, I think, a shift from on-site revenues to -- offshore revenues, I think, which have also shown up in the margins. But more importantly, I think it was absolute for the company to be able to work well. I think now it's about now 4, 5 months. And happy to inform you that 100% of our people work from home and they're working well. And my team said yesterday, I think our customer satisfaction actually last quarter was the highest in terms of the quality of deliverable and satisfaction of the customer. So things are going well in terms of us being able to do work.

Second, obviously, was about how do we do the rest of the operations? Obviously, I mean, the internal operations or HR and all that, I think we had to -- like somebody said, we had to do so much of digital transformation that everything has become digital in the way we operate today from onboarding people to training them to onboarding them onto projects and everything, new people and so on and so forth. But more importantly, it was how we're going to deal with the external market. I think the good news is that teams have been able to adapt themselves well and actually, I think, work with both existing clients, and actually, more importantly, I think, new clients -- I think our traction in the last quarter with new clients, getting new opportunities into the pipeline, I think, was extremely good. So from a qualitative perspective, obviously, there was a big hit from our large clients. I think we're expecting a significant drop, which happened last quarter, but we see the client is coming back to life. And hopefully will not go back to where it was, but I think we'll see some reasonable growth in the client. And the other was obviously tyhe nonessential retail, which is still not as good as where it should be. The other sectors, I think they'll be focused in the last few quarters for the agri business, utilities, commodities, service industry, and the -- we call the others and the ISV kind of stuff. So there, we see traction and we are able to create interest. So the pipeline, as we see, looks good. We believe that the worst is behind us, unless, obviously, there are some absolutely unforeseen circumstances. So what we are seeing is there are no further drops, either customers are restarting or are at least not are billing, but there are no drops to what the kind of work which is going on, which is good news. So going forward, it's clear, obviously, I mean, the many things we are focused on, ensuring we stay good with the current business, try to get back some of the business, which has been reduced because of these effects, but for that, the customers need to come back, start hoping for the deferred delayed projects to restart. There's quite a few of them. So -- and then obviously, go about trying to convert the current opportunities. And while do that to deliver on the services extremely well. The cost reductions we had announced, I think we had implemented, we're actually now trying to come back. So we made some changes this quarter of -- are calling back some of the cost saving reductions and things like that. And hopefully, we will do most of it by the middle of next quarter to go back to where we are.

So the number of people have decreased a little. And I think for the current revenue streams, that's good. So I think that will show up most probably full effect in the next quarter results. So as I said, in our press release yesterday, I think we can look forward to a more positive future with growth in the next quarters. So that's, I think, a summary of our analysis, of our performance. We also acquired GBW last quarter and integrated it. Unfortunately, I think their business was very heavily COVID affected because they provide customer experience services mainly to retail and quick service industries, and so people couldn't go and do these kind of services. So that got affected. But we think that's a great platform and a good investment for the future. And when things turn around, I think it will add back to the growth and strategic differentiation of the company. So I'm not worried about that. I think it's a good, strategic investment in the right space, in the customer experience space for the company, while the business in the short term is affected. So that's a net-net summary.

I'll hand over to Jagan, I think, he has the presentation for you, and we'll go through that. And then very happy to take any questions and comments and anything else you may have. Okay. Thank you.

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Jagannathan Chakravarthi Narasimhan, Sonata Software Limited - CFO [3]

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Thanks, Srikar. Good morning, all. Welcome to our analyst call for quarter 1 2021. And just a brief presentation from our side on highlighting of financial performance. So for the -- this quarter, we had the entire organization move to work-from-home model. The second highlight for the quarter is we acquired GAPbusters Limited this quarter. Sonata made a strategic investment in training sustainability-related platform. Sonata won Microsoft Eagle award for 2019, '20 from Microsoft. So it's one of the prestigious awards won by us. Six new customers are added in this quarter. In spite of COVID situation, we were able to add customers in this quarter. Stronger cash conversion despite COVID headwind. Although our DSO has gone up, our net cash position has improved by about INR 110 crores this quarter.

On the financial performance, this highlights revenue and EBITDA on PAT the growth. As mentioned, we had a -- at the consolidated level, both India and -- India business as well as the Internet IT services, India business has improved the revenue this quarter. International IT services, as mentioned by speaker in the month of March, as we have highlighted the second largest customer, Europe-based travel customer, they have suspended their operations. So the revenue is expected to have impact for us. However, we have given a warning on the profitability of about 40% drop. We were able to take action, strategic action, and able to bring down the reduction in the cost, which resulted in the drop in profitability, it was only 24% this quarter.

And it's very clear that this is the kind of reason it is.

(technical difficulty)

But still, we were able to pay up EBITDA for the quarter and the PAT for the quarter is -- the growth has been -- the quarterly -- there is a degrowth on the EBITDA, but on the overall percentage -- as a percentage, we are still doing around 23.2% of EBITDA. This is considering the current situation, we have done well for this quarter on the International IT Services. We are continuing to focus on delivering the better results in the coming days.

Then about the domestic business, the revenue has grown compared to last quarter. There was a quarterly revenue growth has been about 3.9%. EBITDA growth -- quarterly EBITDA growth has been about 0.9%, and the PAT has been about 2.6%. We continue to focus on the improvement in the gross contribution, as Srikar mentioned every time. We measure this business on gross contribution, and we continue to focus on incremental execution for this. This has been done very well, considering the current situation in the Indian economy and the performance of other businesses.

This is the financial summary. And for -- it's clearly mentioned here, international business revenue -- for the quarter-on-quarter, there was a drop of about 15%; and year-on-year, there was a drop of 9%. And domestic business, there was an increase of 12% quarter-on-quarter and 19% year-on-year. On the EBITDA front, international business, there is a drop of about 10%; and domestic percent, there is a drop of a little more than that. The consolidated level, the EBITDA drop has been about 15% year-on-year. It has been a little more compared to last year. The PAT, our international business has a drop of 15% at PAT and domestic business added up about 36%. But overall, the revenue was improved in the domestic business.

So there is some amount of operational metrics. This is just to give a summary of whatever we have given in the investor presentation. Our U.S. geography continued its position. It is -- about 64% of our revenue comes from U.S. The percentage has increased more because of the drop in Europe. All of you know that our leading customer in Europe the revenue has -- their revenue has dropped. That's one the reason. Otherwise, we have really competency wise, and we have given the revenue on each of the industry verticals also. Industry vertical, there has been drop in the travel vertical for this quarter. That's the highlight of this. On-site portion has come down because of the changes in the situation. And also it has been improving in the last couple of quarters, and we continue to -- because of the changes and because of the situation in on-site, it has come down compared to last quarter. These are the broad financial metrics which we wanted to share with you. Now there are some more of this operational metric. This will be uploaded in our website for you people to refer to.

We will now hand it over for the questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a first question from the line of Madhu Babu from Centrum.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [2]

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Congrats on a strong execution at the margin level. Sir, just on the travel vertical. So now assuming the operations can improve from October onwards, post COVID. So how do you see the recovery in the top account in travel? I mean, when can we expect a strong swing in the second half because the fall has been steep. And second, on the new account additions because from the last 3 acquisitions, [Scalable] and GAPbusters, most of them have a decent client base. So how are we mining the services in these accounts? That's it from my side.

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Palem Srikar Reddy, Sonata Software Limited - CEO, MD & Executive Director [3]

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Okay. So as I said last time, Madhu, that the client, we would be very happy, would go back to 50% of where they were by Q4. So as I said, we've also seen some change, and we'll see some growth from the client even in the current quarter as we speak. And hopefully, they'll continue to do business because there are these continuous ups and downs because suddenly, they have again stopped travel back from Spain. And but there is -- I think they are now taking that as like as life-as-usual, that the start and stop will continue. But the good part is, as long as I think they're funded by the government, and they believe that technology investments are where they should put their money in right now, and that will help them deliver a better product at a much better customer experience at a lower cost in future, we'll continue to do that. So I am expecting if there is no untoward incident, that we should see a steady growth from the top clients from this quarter onwards, heading towards into Q4. But as I said, it won't -- I don't expect it to be more than 50% of what it was. It has come down to about 10%, 15% So we will see -- I hope that we can go back to at least 40% to 50%. But we'll see steady growth starting from this quarter.

And to answer your other questions, obviously, the intent in all these accounts is to mine these accounts. And some accounts, I think we have seen some mining, which is showing up in the results, both, I think, a couple of accounts from Scalable and I think one account from (inaudible) GBW, GAPbusters, I think it's absolutely new, we are still integrating. And then figuring out what their customers will need. And I said, most of their customers are in the retail space and are in a little slowdown mode. So it's -- right now may not be the best act to go back to them to -- with the offering. But we see that as an opportunity -- and things change, we're also trying to take reverse, take the GAPbuster offerings to our clients who are non affected sectors because customer experience is a solution which is needed by every industry. So that's, I think, what we're trying to do. I hope I've answered your question, Madhu.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [4]

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Yes, yes, sir. And just on GAPbusters, the annual revenue of INR 10 million at the time of acquisition. So what was the current quarter contribution? And they do a lot of surveys and all that. So I mean how that will align with our business? At least from my understanding, what I've seen on the website.

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Palem Srikar Reddy, Sonata Software Limited - CEO, MD & Executive Director [5]

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Okay. So what GAPbusters is, the customer experiences, they have a platform from designing the survey, like a Qualtrics or a Survey Monkey or whatever it is, from designing a platform to delivering the survey. The survey can be done either yourself or by a third-party who visits the location and then does the survey. And then automatically, the survey results gets uploaded into the platform. And then there's an analytics platform, which is there, where this data goes in and then the clients can then online view the survey results. So the largest client, I think, has about 10,000 locations, which they view. It's a large oil company worldwide. And so they have every single retail and gas station on this system. And so they can see at an area level, what is the analytics and different parameters.

And the second thing is then they're able to take it and connect it to the operational data to see the correlation between customer experience and like operational performance, and then they are using it actually as a metrics to measure the performance of their employees and so on and so forth. And then on top of it, there's an action tracking system. So the -- where it fits in for us is like we'll be able to combine the customer experience data with the operational data, which we are already having today and offer a unified customer experience management solution to our clients. I think that's where we are heading, both investing into the platform and building on the capability of the platform and going to some of these existing clients and offering this. So that's the -- this thing. I'll ask Jagan to give you the numbers of what they were this quarter and what were the annual revenues last quarter. Jagan, can you answer the question?

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Jagannathan Chakravarthi Narasimhan, Sonata Software Limited - CFO [6]

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Yes. Yes. For the quarter, there's about USD 800,000. In terms of the Australian dollars, it's about AUD 1.3 million.

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Operator [7]

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We have a next question from the line of Baidik Sarkar from Unifi Capital.

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Baidik Sarkar, Unifi Capital Pvt. Ltd. - Research Portfolio Manager [8]

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Given the circumstances, a very good set of numbers. Two broad questions. The ex travel business seems to have been almost flattish Q-o-Q. Just to get us a sense of what is driving traction here? And also explain to us, what is your definition of retail essential? And what's been the experience of clawback here in, say, June, July and August? The ex travel business.

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Palem Srikar Reddy, Sonata Software Limited - CEO, MD & Executive Director [9]

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Okay. There are many questions. So I'll take the -- essential retail is (inaudible) quick service kind of food kind of people mainly and pharma retailers. So these are the people who -- and then specialty retailers like in agri implement and so on and so forth. So these are what we call the essential. And nonessential are jewelry and fashion garments and all the other, shoes and so on and so forth. So that's the nonessential retail. So that's how we define it.

And the second question was really, what is driving. There was no de-growth in the existing non-travel accounts. So what is driving, as I said, is that our ability to engage with these clients, in these current times, and actually offer them solutions so those people who are obviously wanting to invest. There are people -- I mean, there are -- between them, there are people who want to invest, who can't invest kind of stuff. Actually going to the people who can invest is very proactive ideas about how they can start some new things to get more value out of their investments, especially those who have put in the Dynamics systems because there's now a lot of data available to do analytics and then putting surround systems on power platform and stuff like that. So that's what is one which is driving. Second is, obviously, last quarter, I think we had more of a strategic, I would say, tie-up with Microsoft to drive, what I call, the Dynamics modernization program, which is moving current clients to cloud. And I think we have seen a huge traction there. It starts with initial assessment, which is funded by Microsoft, which we execute. And then obviously, if the client then wants to actually execute on the project, then the reasonable chance that we'll get the project kind of stuff. So that's been, I guess, the second major driver, I would say. And then the others category have been steady secular growth because those customers are continuing to invest and have not flacked out.

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Baidik Sarkar, Unifi Capital Pvt. Ltd. - Research Portfolio Manager [10]

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Okay. That's very helpful, sir. In the India product, we see business traction has been rather strong. Could you give me a sense of what are the split here between cloud storage, GRP, OEIS, Microsoft and otherwise? And how much of this India business would you see is recurring in terms of monthly license and stuff like that?

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Palem Srikar Reddy, Sonata Software Limited - CEO, MD & Executive Director [11]

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Okay. Maybe I'll ask Mr. Sujit Mohanty who is on the call to answer your questions. Sujit, are you on the call? Hello? All right. He is not on the call, so I'll answer.

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Sujit Mohanty, Sonata Software Limited - Head of Sonata India Business [12]

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Hello. Can you hear me?

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Palem Srikar Reddy, Sonata Software Limited - CEO, MD & Executive Director [13]

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Yes, please go ahead, Sujit. Have you heard his question?

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Sujit Mohanty, Sonata Software Limited - Head of Sonata India Business [14]

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Yes, I heard the question. So today, from the total business we do, out of that, almost 37% is in the cloud. And for the micro subside, a lot of the total Microsoft business we do out of that 44% is on the cloud. So that's how cloud and on-premise mix. Is that the answer -- is that the enough?

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Baidik Sarkar, Unifi Capital Pvt. Ltd. - Research Portfolio Manager [15]

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So that's helpful, Sujit. So can we assume that given the Microsoft side and the overall 5% to 37%, about 37% of the revenue will actually be recurring quarter-on-quarter because there will be a subscription that you collect every month. Is that a fair assumption?

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Sujit Mohanty, Sonata Software Limited - Head of Sonata India Business [16]

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