Datamatics Global Services : Transcript – Q4FY24 Earnings Call - 9 May 2024

"Datamatics Global Services Limited

Q4 FY'24 Earnings Conference Call"

May 09, 2024

MANAGEMENT: MR. RAHUL KANODIA - VICE CHAIRMAN AND CHIEF

EXECUTIVE OFFICER

MR. SANDEEP MANTRI - EXECUTIVE VICE PRESIDENT

AND CHIEF FINANCIAL OFFICER

MR. MITUL MEHTA - EXECUTIVE VICE PRESIDENT

AND CHIEF MARKETING OFFICER

MODERATOR: MR. PRATIK JAGTAP - E&Y INVESTOR RELATIONS

Page 1 of 15

Datamatics Global Services Limited

May 09, 2024

Moderator:Ladies and gentlemen, good day, and welcome to Q4 FY'24 Earnings Conference Call of Datamatics Global Services Limited. As a reminder, all participant lines will be in the listen- only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Pratik Jagtap from E&Y Investor Relations. Thank you, and over to you.

Pratik Jagtap:Thank you, Yashashri. Good afternoon to all participants in the call today. Welcome to the Q4 and full year FY'24 Earnings Call of Datamatics Global Services Limited. The results and presentation have been already mailed to you, and it is also available on the website of Datamatics. In case anyone has not received a copy of this release and presentation, please do write to us, and we will be happy to send you all.

To take us through the results today and to answer your questions, we have with us the top management of the company represented by Rahul Kanodia, Vice Chairman and CEO; Sandeep Mantri, EVP and Chief Financial Officer; and Mitul Mehta, EVP and Chief Marketing Officer. Rahul will start the call with a brief overview of the quarter on business, which will be then followed by Sandeep talking on financials and then we will open the floor for Q&A session.

I would like to remind you that anything that said on this call, which gives any outlook for the future or which can be construed as forward-looking statements must be viewed in conjunction with the risks and uncertainties that we face. These risks and uncertainties are included, but not limited to what we have mentioned in the prospectus filed with the SEBI and subsequent annual reports, which you can find on our website.

With that said, I now hand over the call to Rahul sir. Over to you, sir.

Rahul Kanodia:Thank you, Pratik. A very warm welcome, and thank you, everyone, for joining our quarterly Q4 FY'24 call today. We are glad to have you all on this call with us. I will briefly discuss some of the key quarterly and full year highlights, while Sandeep will provide an update on the financials, after which we will open the floor for Q&A.

We are happy to end the Q4 FY'24 on a healthy note. Our revenue increased by 11.8% and EBIT increased by 27.8% on a quarter-on-quarter basis. For the FY'24, we witnessed a revenue growth of 6.2% over FY'23, and we're able to maintain double-digit EBITDA margins at 15.7%. We added 10 new customers during the Q4FY'24. Our Digital Experiences margin has taken a hit during the year. However, we have eliminated the loss-making projects. Therefore, we will see an improvement in margins through the course of the next financial year. Our Digital Technologies margin should also improve for multiple reasons. One, we have installed a new leadership team and implemented several cost control measures. Two, we are putting a greater focus on hyperscalers. And three, we are foreseeing a growth in revenues from our intelligent automation products.

Last quarter, I had updated to you that Datamatics featured in the Forbes Asia's 200 Best Under a Billion Company. I am happy to share that we are now part of Dun & Bradstreet list of top 500

Page 2 of 15

Datamatics Global Services Limited

May 09, 2024

value creators. It is a recognition for the value we have created for all our stakeholders as well as our outstanding corporate performance over the years. I'm happy to share that we have recommended a total dividend of INR 5 per share, that is 100% of the face value of INR 5 each for the year ended March 2024.

As we step into FY'25, we will continue to focus on the Western markets, strengthen capabilities along hyperscalers and penetrate deeper into existing accounts. In line with this, we recently acquired Dextara Digital, a platinum-level provider of Salesforce services. Dextara acquisition aligns with our growth strategy of focusing on hyperscalers and the US market. Dextara brings an extremely capable management team and a broad clientele across industries that is of specific interest to us. 25% of Datamatics customers use Salesforce as a platform. And with Dextara's strong credentials, we will be able to service our customers better and look forward to helping them go deep in Salesforce.

For FY'25, we remain bullish on the opportunities that artificial intelligence presents to us. We have stepped up our investments in AI and are working closely with Microsoft and Google. We have built our own customizable, small language model and copilot and we will be showcasing these capabilities at various industry events in the coming year. We have also built an AI framework for our digital experiences business. Through the financial year, we have executed 10 projects in AI. Furthermore, we have incorporated GenAI in our intelligent automation suite of products and have rolled it out to over 30 customers. On a separate note, we have strengthened our management team and inducted several senior members into the organization. We will continue to augment the team through the course of the next year. We see the Western world slowing down on their technology and outsourcing spends due to the uncertain macroeconomic environment. However, we expect a growth of 7% to 8%, while maintaining the current margins for the next financial year.

I take this opportunity to thank all our stakeholders, including employees, customers, and shareholders for being an integral part of our journey. With that, I will now hand over the call to our CFO, Mr. Sandeep Mantri. Sandeep, over to you.

Sandeep Mantri:Thank you, Rahul. Welcome, everyone, and thank you for joining us in Q4 FY'24 earnings call. Let me start with the financial performance for the Q4 FY'24 and then I'll take you through the full year 2024 numbers as well.

Our Q4 FY'24 revenue stood at INR 412.7 crores, which is a growth of 11.8% on a sequential basis and a marginal drop of 0.9% on a Y-o-Y basis. Our EBITDA for this quarter was at INR

1. crores, which is up by 22.8% on a sequential basis. Our EBITDA margin for the quarter was up at 15.7% as compared to 14.3% in the last quarter. Our EBIT for the quarter was at INR

1. crores, which is up 27.8% on a sequential basis. EBIT margin was at 13% as compared to 11.8% last quarter. Other income stood at INR 15.9 crores, grew by 49.7% sequentially, primarily due to investment income and sale of Nashik property. PAT after NCI was at INR 52.5 crores, which is up by 27.2% on a sequential basis and down by 12% on a Y-o-Y basis. Our EPS for the quarter was at INR 8.9 per share, which was higher than last quarter, which was at INR 7.01, but lower than last year same quarter, it was at INR 10.13 per share.

Page 3 of 15

Datamatics Global Services Limited

May 09, 2024

Talking about segment-wise revenue performance. Our Digital Operations revenue was at INR

202.4 crores, which is a growth of 26.2% on a sequential basis and 8.1% on a Y-o-Y basis. Digital Operations EBIT margin was at 23.5%, and its contribution to total revenue was 49%. Our Digital Experience revenue was at INR 61.8 crores, which is a growth of 7.4% on a sequential basis and 3.8% on a Y-o-Y basis. Its contribution to total revenue was 15%. EBIT margin for Digital Experience was 11.8%. Our Digital Technologies revenue was at INR 148.5 crores, declined 1.9% on a sequential basis and 12.4% on a Y-o-Y basis. EBIT margin is 0.7%. The contribution of Digital Technologies to total revenue was 36%.

Talking about FY'24 financials, our revenue was at INR 1,549.9 crores, which is a growth of 6.2% on a Y-o-Y basis. EBITDA was at INR 244 crores, and EBITDA margin was at 15.7%. Our EBIT was at INR 207.7 crores and margin was at 13.4%. Our other income was at INR 45.1 crores as compared to INR 38.7 crores last year. Tax rate for FY'24 was 21.4% compared to 23.9% in previous year. So there is an improvement in that rate. Our PBT was at INR 250.8 crores as compared to INR 243.4 crores in last year. PAT after NCI was at INR 198.2 crores compared to INR 188.9 crores in last year.

For the full financial full year, if we see segment, our Digital Operations revenue was INR694.4 crores, which is 10.1% up from previous year. Digital Operations EBIT margin remains healthy at 19.9%. Our Digital Experience revenue was to INR 244 crores, which is 11.2% growth over previous year. And Digital Experience EBIT margin remains at 17.1% on a full year basis. Our Digital Technologies revenue was at INR 611.5 crores, which is slight up 0.4%. EBIT margin for Technology business was at 4.6%.

We continue to maintain a healthy balance sheet. As of March 31, 2024, our total cash and investment, we have zero debt, it stood at INR 653 crores. Post this, we have paid approximately INR 110 crores towards Dextara acquisition. Our DSO was at 67 days as of March '24, which is same as in March '23. In terms of geographical footprint, US remains our largest geo, with 54% of our business coming from US market, followed by U.K. and Europe at 13% and the rest of the world, including India at 33%.

In terms of industry footprint, technology and consulting was the largest segment for us, which constituted 27% of our revenue, followed by BFSI, which stood at 25%, then education and publishing, which is 12% and then manufacturing, infra and logistic, which is at 12%, non-profit or non-government organization were at 11%, retail at 9% of our business, other segment contributed about 4% of our total revenue. In terms of client concentration, it remains very healthy with top 5, 10 and 20 clients contributing 23%, 35% and 51%, respectively.

With this, I will now pass on the call to operator to open the floor for questions. Thank you for your patience and continued interest in Datamatics.

Moderator:Thank you very much. We will now begin with the question-and-answer session. We'll take a first question from the line of Grishma Shah from Envision Capital.

Grishma Shah:Sir, curious to know why in quarter 4 the Digital Technologies divisions have seen such as sharp drop in margins?

Page 4 of 15

	Datamatics Global Services Limited
	May 09, 2024
Rahul Kanodia:	Yes. So primarily, as I mentioned in my address that we have invested very heavily in the AI
	space. So that is an important element. We've built our own small language models. We built
	our copilots. We've built frameworks for our Digital Experiences. So that requires investment.
	And therefore, you see the margin drop. As you know, we don't capitalize any of the IP
	development that we are doing. So that's the primary reason.
Grishma Shah:	And you also mentioned that some of the low-margin clients you have done away with.
Rahul Kanodia:	That is in the Digital Experiences space.
Grishma Shah:	That is in the Digital Experiences space. Okay. Is that the reason that our collections have
	improved this year compared to last year?
Rahul Kanodia:	Our current collections are steady at 67 days last year as well as this year. So it remains steady.
	Of course, quarter-by-quarter, there's some degree of fluctuation, but by and large, it is steady.
Grishma Shah:	Dextara will be incorporated or included in our numbers from quarter 1?
Rahul Kanodia:	That is correct, yes.
Grishma Shah:	How much more money will there be there in the payout, INR 110 crores already given?
Rahul Kanodia:	Yes. The balance payout is based on certain performance parameters. It depends on them hitting
	certain targets, but it could range somewhere around INR 60 crores, INR 70 crores depending
	on performance.
Grishma Shah:	We also have done some small acquisition of 23% remaining in a JV. What is that?
Rahul Kanodia:	We had a small joint venture, which was focused on Salesforce. But after we acquired Dextara,
	we felt we did not need another entity also focusing on Salesforce. We acquired that, and we
	will roll this piece of business into the Dextara business.
Grishma Shah:	So was that like a very big?
Rahul Kanodia:	No, it was a very small joint venture because we wanted to start the Salesforce business. We
	formed the JV and that started doing business. But since we acquired Dextara, we do not want
	to have 2 different entities doing the same Salesforce business. We acquired that 23%. It's now
	100% subsidiary of Datamatics. And we'll merge the business with Dextara.
Grishma Shah:	7% growth guidance is with Dextara or without Dextara?
Rahul Kanodia:	It is inclusive of Dextara. So organic growth, I would expect approximately 3% and about 4%
	will come from Dextara.
Grishma Shah:	What is it that you are picking up from the environment because we have been growing 3%, 4%
	organic.

Page 5 of 15

	Datamatics Global Services Limited
	May 09, 2024
Rahul Kanodia:	Yes. So right now, we do see a slowdown in the world in terms of outsourcing and in terms of
	technology spend. And if you see many of the companies, they are looking at a very slow, single-
	digit kind of growth numbers. We are seeing that slowdown. And we expect that we will grow
	organic about 4%, and Dextara will contribute about 4%, which is inorganic, totalling to about
	8% top line growth.
Grishma Shah:	But Dextara will also continue to grow because it's on a smaller base and is a faster growing
	company.
Rahul Kanodia:	That is correct. But we've just acquired them. They presented the plan. If they hit the plan, we
	should exceed it, but that needs to be seen because it's only been 1.5 months since we acquired
	them.
Grishma Shah:	Okay. And next year, tax rate would be?
Sandeep Mantri:	Tax rate would be more or less same, Grishma, which will be between 20% to 22% like last
	year.
Moderator:	We'll take our next question from the line of Nikhil Poptani from SMC Family Office.
Nikhil Poptani:	So my first question is on the pipeline. Like in the quarter 3 con call, you said that we had a
	pipeline of INR 245 million. Where is the pipeline right now?
Rahul Kanodia:	The pipeline is slowing down. And right now, it stands at about INR 200 million, and we can
	see that slowdown happening. And that's why we've been also a little soft on our projections for
	growth next year.
Nikhil Poptani:	But we have increased our spending on marketing and sales, right? So how is that playing out?
Rahul Kanodia:	We are increasing our spend on sales, not so much on marketing. We are seeing an uptake in the
	product business; we are seeing an uptake in the AI space. We see a very strong pipeline also in
	the Digital Experiences space. However, in the Technologies space, the pipeline is a little soft.
Nikhil Poptani:	And my question is on the AFC front. Like there is a lot of rebuilding happening in the United
	States the infrastructures. How are we targeting that? Are we eligible for those big orders or
	something like that? Do we have some kind of criteria?
Rahul Kanodia:	Yes. There are 3 segments in the US. One is the road transport, one is a train transport and the
	third is metro. We're not targeting the train. We're targeting the metro and the roads. And road
	means buses and things like that.
	And in the metros, there are multiple segments. The top ones like you have Chicago or New
	York City, these are very large, they are $500 million-plus deals. We will not qualify for those
	deals. Then the multitude of these that are between $10 million to $40 million. Datamatics
	qualifies for those deals very well. And there's a third segment, which is sub-$10 million. So we
	will qualify for that anyway.

Page 6 of 15

Datamatics Global Services Limited

May 09, 2024

	But we are looking at those $10 million to $30 million- $40 million deals, that's the segment that
	we are targeting. We've got a decent pipeline there. And as far as India is concerned, we have
	bid for Pune Metro, and we are currently evaluating Mumbai Metro Line 4, 5, 6 and 9. For the
	others, we are sort of evaluating. So as we be bid for this, the pipeline will certainly become
	much stronger.
Nikhil Poptani:	And sir, my question is now on Digital Technologies. The margins are shrinking. And so you
	said that you've changed a little senior management in the digital space side. Sir, can you
	elaborate more on that? And can you elaborate more on this AI developments that you have
	done, like co-piloting, small LLM models, sir, can you elaborate more on that?
Rahul Kanodia:	Yes. On the management front, we've hired Bala Gopalakrishnan, who is now the President of
	the Digital Technologies business and under him, we've hired 2 or 3 more senior people. And
	we've also churned some of the other erstwhile management team members of Datamatics.
	There's been some churn in the leadership in that space.
	We've also hired global sales head in the US, Dinesh Kumar, and he's on board, so we should
	see that. And then, of course, finally, as through the acquisition of Dextara, we have with us now
	Sreekanth Lapala, who have very strong background where he has managed over 25,000 people
	on a global base with Virtusa. He has handled very large projects and strong capabilities. We
	have him as part of the management team as well. So that's as far as the churn in management is
	concerned. What was the other question?
Nikhil Poptani:	So just about AI.
Rahul Kanodia:	The artificial intelligence investment, yes. We've built the small language models. The small
	language models have been built on top of large language models because that gives you a much
	more precise and accurate answer and response to what's been happening. We've also been able
	to integrate Microsoft, OpenAI and Google Gemini. And then underlying this, we built out
	BERT models, we as with others. So, the BERT models have been built. The small language
	models have been built and we've integrated with OpenAI as well as Gemini. Then we've built
	a lot of copilots. Copilots of 2 types. One is the Microsoft Copilot, which we have incorporated
	that into the legacy systems. Plus, we built our own copilots because not everybody has
	Microsoft Teams or Microsoft as a platform. So, we built our own copilot that could interact
	with legacy applications and help our customers. We've spent a fair amount of time and effort
	in building these solutions. This year, we will be taking them to the market, showing them to
	our customers and showcasing them in the events that we participate as well.
Nikhil Poptani:	So right now, you said that you have access to 30 customers. So how was the response there?
Rahul Kanodia:	The response has been decent. They are still dirtying their hands, so they started using it. We
	piloted it, so we rolled out this is part of our TruBot and TruCap+ products. And we've
	incorporated it, rolled it out to these 30 customers. We are right now collecting feedback. So far,
	the feedback has been very positive. They're very happy with the way it's working. But once
	they get into full-fledged production, that's when we know what happens. But right now, the
	feedback has been very good, and they've been very happy with the way it's performing.
	Page 7 of 15

	Datamatics Global Services Limited
	May 09, 2024
Nikhil Poptani:	I also have a few questions on KPIs. Like what is the head count in each of the segments, like in
	Digital Operations, Experience and Technologies? And sir, what is the onshore, offshore mix?
	And what is the effort mix over there?
Rahul Kanodia:	I don't have that breakup of head count by each of these handy right now. We'll just send it to
	you separately.
Nikhil Poptani:	And sir, like what will be our blended utilization, like on-site utilization, offshore utilization and
	blended?
Rahul Kanodia:	I would imagine that our utilization is in the range of 90% to 95%. We don't carry a very heavy
	bench. But as you know, we are investing in building some of these IPs and products. So that's
	where the utilization rate does not fully fit because you're investing in building IP. And that does
	not go on the utilization rate. But yes, you can roughly take between 90% and 95%, depending
	on the business unit that you look at.
Nikhil Poptani:	So that's, sir, blended or is it onsite?
Rahul Kanodia:	No, blended across. On-site is almost 100%, 99%, 98%. So onsite, we don't keep much of a
	bench. The bench pretty much remains offshore.
Nikhil Poptani:	And then I have a few questions on what is the book-to-bill ratio? What is our billing rate?
Rahul Kanodia:	Yes. The billing rate is difficult to give you an overall number because it varies by each business
	and the commercial model that we have with the customers. Some of them are unit-based pricing.
	Some of them are time and materials, some of them are fixed price and milestone based. So, it
	varies. And therefore, one can't really have an overall company level billing rate. For example,
	when you do the AFC business, these are large milestones that happen once in 5 months, 6
	months. If you do T&M, then it's monthly, some of them are volume based, so depending on
	number of documents we process, whether it's invoices or bill of lading or what have you, it
	varies on that, so.
Nikhil Poptani:	Our book-to-bill ratio? You might have that, book-to-bill ratio.
Sandeep Mantri:	Book-to-bill ratio. Basically, what do you mean by that?
Nikhil Poptani:	So like our orders to our invoices ratio or something like that?
Sandeep Mantri:	You are saying order book. We don't disclose order book as of now. in every business unit, there
	will be different type of contracts. Like in volume rate, it is always MSA based billing. So you'll
	not have a clear order book, but you have MSA on which volumes are driven and every year
	we've been like. Then you have Experience where it is more T&M or output driven pricing, then
	you have Digital Technologies where you have T&M plus fixed price. In technologies, you have
	projects which are running for 3 to 5 years as well.
Nikhil Poptani:	Sir, I just wanted to know like in Digital Technologies, like our margins are low this time around.
	What are the levers that are play a role in expansion? And sir what is the going ahead strategy
	in the Digital Technologies space?
	Page 8 of 15

Datamatics Global Services Limited

May 09, 2024

Rahul Kanodia:I think there are a couple of things. One is in the AFC business, as we mentioned earlier, that we will pivot to the Western world. And as we focus on those markets, the margins will improve. India is a very price sensitive market, as we are all aware of. So that's one piece of it. The other piece of it is really going for the larger deals in existing customers and the hyperscalers, because the hyperscalers command a better premium. So that's the other area that we are focusing on, and the margin should improve. Having said that, I did mention it in my address that we have taken some cost control measures, and we have tightened our belt. So that also helped impacting the margins as we tighten the belt in some of the Digital Technology areas. The product revenues once we see a good pickup in the product revenues, so once that happens, also, you see that impact on the margins as well.

Sandeep Mantri:And you should start seeing that impact effective this year, FY'24-'25.

Nikhil Poptani:What is our strategy to improve the wallet share?

Rahul Kanodia:Yes. So that's really talking about mining and having a deeper engagement with customers. We are in the process of changing a lot of the sales focus to mine existing customers versus hunt new logos. And based of that we've changed certain policies within the organization, et cetera. So we should start seeing an impact of that, hopefully, in this financial year.

Nikhil Poptani:Can you just discuss how many Fortune 500 companies are we doing businesses with?

Sandeep Mantri:Fortune 1000, will be above 80 to 100 such companies will be part of our Fortune 2000 companies.

Nikhil Poptani:And sir, can you just give me a number how many of those like $10 million plus account, 1 $10 million plus account?

Sandeep Mantri:We don't disclose those numbers. We are disclosing the customer concentration wherein you see that top 5 customers are about 23% of total revenue. Top 10 customers are about 35% of revenue and top 20 customers are about 51% of revenue. So, beyond that, we don't share any information right now.

Nikhil Poptani:If I have further questions, where can I reach you?

Sandeep Mantri:You can reach to E&Y, Pratik of E&Y, they will connect to us.

Moderator:We'll take the next question from the line of NGN Puranik from Enam.

NGN Puranik:If you can elaborate on the Dextara. The founder of Dextara has a large experience in building sales organization and delivery organization. So how do you use that experience and their own ability in building SFO partnership into Datamatics, reorganizing the Datamatics sales organization. And focusing on large deals in your organization. So if you can give more colour to that because that's what's important from a long-term perspective, how do you use their ability to construct more tangible Salesforce practice within your company?

Rahul Kanodia:There are two or three things happening with Dextara. So one is that they were a relatively small company when we acquired them. Total revenue was about $7 million top line. But the people

Page 9 of 15

Datamatics Global Services Limited

May 09, 2024

	who come from there, they have experience of working with large customers and large projects.
	So, the management team has very strong capabilities. It's just that because they were small,
	they were doing smaller projects. So, a couple of things happen. One is that with Datamatics
	they can themselves bid for larger projects because now they will be eligible for larger projects,
	point number one. Point number two, Datamatics itself has a very good pipeline in Salesforce.
	With this thing coming in, we would be in a position to convert a lot of that pipeline. Last year
	and year before, we could not convert many because we didn't have the credentials. But Dextara
	has the credentials, and they have the team who has done these large deals. So therefore, they
	will be able to close several larger deals that we bring to the table. The third is that we have a
	team that's focused on the relationship with Salesforce. And as we were focusing on the
	hyperscalers, there is a team in Datamatics that focuses with Microsoft, with Crowdbotics, with
	OutSystems, with Salesforce. So Dextara and our team will work together because we are
	engaging with Salesforce directly.
	So, the third is that as we build for some large deals, we will use the expertise and experiences
	of the Dextara team to -- be party to that whole program and go along with us in building it. The
	last element is that we are now conducting our sales enablement program in the US. This entire
	team will be flying down to the US as well. I'm working with our sales team on how we target
	these large deals, how do we leverage existing relationships to get to $5 million, $10 million,
	$20 million deals.
NGN Puranik:	And their experiences in what vertical, in the sales?
Rahul Kanodia:	So right now, at Dextara, they have a deep expertise in Salesforce, but the team comes with a lot
	more expertise -in BFSI, manufacturing, healthcare. They've done a lot of work there.
NGN Puranik:	So have you worked on the probable features that you can work with them because these guys
	will have a larger, experience in fortune 500 companies, working with them.
Rahul Kanodia:	Yes. As I mentioned, we are having a meeting in the first of this month, the 24th of this month
	in the US, where we will have all the discussions. So first, since we acquired them on here first
	of April, the first 1 or 2 months was more settling down, getting the administrative things in
	place, HR connect and all that. But now we will get it plugged into the sales.
NGN Puranik:	How many from original Virtusa sales you're getting here?
Rahul Kanodia:	Their sales team is thin; their sales team is about 3-odd people in the US. They were only 7
	people, but it's not the sales team, as much as the management team. The management team is a
	very strong team.
NGN Puranik:	Sreekanth and company.
Rahul Kanodia:	Yes. Sreekanth and 1 or 2 people under him.
NGN Puranik:	And the other thing is about you talked about the small LM you have built on that. So can you
	elaborate on how this was built and how you're going to use it? For every customer, you're going

Page 10 of 15