R Systems International Limited (NSE: RSYSTEMS) Q3 FY23 Earnings Concall dated Mar. 03, 2023
Corporate Participants:
Kumar Gaurav — AVP Finance and Accounts
Satinder Singh Rekhi — Managing Director and Chief Executive Officer
Nand Sardana — Chief Financial Officer
Avirag Jain — Director and Chief Technology Officer
Analysts:
Abhay Jain — Individual Investor — Analyst
Jagdishwar Toppo — Japa Investments — Analyst
Presentation:
Operator
Ladies and gentlemen, good day, and welcome to the R Systems Q4 and Year 2022 Earnings Conference Call. 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. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Kumar. Thank you and over to you, sir.
Kumar Gaurav — AVP Finance & Accounts
Thank you, Michelle. Good morning to all. On behalf of R Systems, I welcome all participants to quarter four and CY ’22 earning conference call. We have senior management of R Systems with us in this call. We will start the call on the opening remark of the company by Dr. Rekhi followed by financial overview by Mr. Nand, and business overview by Mr. Avirag. Thereafter, we will have a closure statement by Dr. Rekhi. Subsequently, we will open up for Q&A session.
Before I hand over, let me read out the customary disclaimer statement on behalf of the company. Investors are cautioned that this presentation contains certain forward-looking statements that involve risk and uncertainties. The company undertakes no obligation publicly to update or revise any such statements. These statements may undertake revision because of new information, future events or otherwise. Actual results, performance, achievement could differ from those expressed or implied in such forward-looking statements.
With this, I’m handing over to Dr. Rekhi for his opening remarks. Thank you. Over to you, sir.
Satinder Singh Rekhi — Managing Director & Chief Executive Officer
Thank you, Kumar. Good morning, everybody and thank you for being a part of this investor call. I would like to present an overview of R Systems for the benefit of all those who are joining us in this conference for the first time.
R Systems was established in 1993 in California as a software engineering company and is now spread across three continents with 18 development and service centers worldwide. R Systems delivers digital transformation services with innovation and creativity to businesses in various industries, technology, telecom, digital media, health care and life sciences, finance and insurance and retail and e-commerce. Our deep industry domain knowledge combined with our expertise in Big Data, Advanced Analytics, AI, Mobility IoT, RPA and Cloud help in transformation of businesses in this digital age.
We continued our high growth journey during CY 2022, especially for digital and product engineering services. Our revenue grew year-on year 31% to INR1,516 crores. That is, USD193 million. CY 2022 EBITDA was 13.7% as against 14% last year. Although, we have improved the margins in quarter four, but still margins are under pressure, primarily on account of salary hikes, attrition challenges and muted utilization. Our efforts for rate hikes and higher rack rates have supported the margins to some extent.
During the year, we onboarded more than 385 associates and 32 key logos. Out of the 32 new accounts added, 10 accounts have potential to become million-dollar accounts in a year’s time. Profit after-tax was INR140 crores as against INR141 crores in the last year. Last year there was higher other income on account of forgiveness of our PPP loan in USA. We continue to have a strong balance sheet with the shareholders’ funds of INR545 crores and net cash balances of INR268 crores to support liquidity and growth. We served $45 million-plus accounts as against 35 [Phonetic] a year-ago.
With that, I will now hand over to Nand Sardana, our CFO to give you a detailed financial analysis.
Nand Sardana — Chief Financial Officer
Thank you, Dr. Rekhi. Good morning to all. Thank you, everybody, for attending the call. The presentation gives detail of both quarter 4 and year 2022. I’ll quickly cover quarter 4 and then move to yearly numbers. Revenue for the quarter was INR399.5 crores or $48.7 million, which is almost flat as Q3. The gross margin was 35.4%, which was lesser by 100 basis points compared to last quarter, mainly due to impact of average salary increases along with 2 lesser deliver days net of rupee depreciation.
SG&A expenses reduced in absolute terms due to lesser provision for bad and doubtful debt, lesser spend on recruitment along with true-up of year-end provisions. Resultant EBITDA was 14.9% compared to 14.5% last quarter. Net profit after-tax was INR41.4 crores or $5.1 million compared to INR36.8 crore or $4.6 million last quarter.
Now, I will give detailed overview of yearly numbers. Revenue for the year was record INR1,515.8 crores or $193.2 million compared to INR1,155.6 crores or $156.5 million last year. Revenue grew at 31% year-on-year. This was an all-around growth, where each business unit and geographies has contributed along with better realization and rupee depreciation. Our present pipeline is good. We are making focus effort to add large accounts to add profitable growth.
Getting down to gross margin, it was 35.1% in current year compared to 35.7% last year. This is a reduction of 60 basis point. Reduction in gross margin is mainly due to impact of the increase in average salaries, net of rupee depreciation and increase in billing rates. Our effort in getting better price realization has reduced the impact of salary hikes. Our offshore rates have improved by 5% during the year and this will help to improve gross margin going forward.
Getting down to SG&A expense line. SG&A expenses have increased by INR73 crores. It was INR324 crores in this year as against INR251 crores last year. In percentage terms, the SG&A was 21.4% this year compared to 21.7% last year. The main reasons for absolute increase of SG&A are due to addition of new sales and pre-sales staff, salary hike, increased retail marketing spends and recruitment expenses.
EBITDA in the year was INR208.3 crores or $26.5 million compared to INR161.5 crores or $21.9 million last year. As a percentage of revenue, EBITDA was 13.7% in this year compared to 14% last year. This slight reduction in EBITDA in percentage terms due to increase in average salary and attrition challenges, all the absolute amount has increased by about 29%. We are committed for improving margins in coming quarters.
Depreciation was — the total expense was INR35 crores compared to INR27.7 crores last year. Interest expense is INR4.9 crores in this year compared to almost same amount last year. Other income this year was INR1.7 crores compared to INR41.2 crores last year. Last year, we got forgiveness of PPP loan in USA amounting to INR22.4 crores. This year, we had an exchange loss of INR7.9 crores compared to exchange gain of INR8.7 crores last year. Exchange losses are mainly due to mark-to-market of outstanding forward cover. Further, the other income comprises of interest income of INR4.6 crore this year compared to INR7.1 crore last year.
During the year 2022, the average rate for USD and euro was INR78.47 and INR82.56, respectively, as against last year average rate of for USD and euro of INR73.83 and INR87.32, respectively. These are the two main currencies for R Systems. As at the year-end, we had total forward cover of $42.2 million with average rate of INR81.39 and euro cover of EUR2.4 million with average rate of INR88.87, which has already been mark-to-market at closing rate of 31st December.
Our tax expense was INR30.5 crores in 2022 as against tax expense of INR28.6 crores last year. Effective consolidated tax percentage for 2022 is 17.9% as against 15.8% during last year. Our effective tax rate has increased as one of our service [Phonetic] unit had completed first five years of [Technical Issues] and moved into 50% tax benefit capacity. Also last year, some of the grants, there was a lesser tax rate. Net profit after tax was INR139.7 crores or $17.8 million compared to INR141.4 crores or INR19.2 million last year. Funding per share for the year was INR11.81 compared to INR11.85 last year.
Getting down to asset side in the balance sheet, total receivable at the end of December 2022 were INR257 crores compared to INR178 crores at the end of last year. Receivable in terms of DSO was 52 days as at December ’22 compared to 53 last year. Our net cash and bank balances as at December 31, 2022, is INR268 crores compared to INR277 crores at the end of last year. We have been constantly generating cash from the business. During the year, R Systems has done shareholder distribution of INR77 crores in the form of dividend, along with CapEx and payment of taxes. The shareholder funds were INR545 crores at the end of December ’22 compared to INR460 crores at the end of last year. We continue to have a strong balance sheet to support liquidity and growth.
With that, let me hand over to Mr. Avirag for review of operations. Avirag?
Avirag Jain — Director & Chief Technology Officer
Thank you Nand, thanks, everyone, for being on the call. I hope everybody is doing good. We continue to focus on digital technology and digital transformation journey. This strategy has helped us in the last few years and should still give us a lot of value and we see a lot of momentum in the business. We like to give you a brief flavor of our global operation.
Digital transformation continues to be the focus for us on select key verticals like technology, telecom, finance, insurance, health care, life sciences, retail and e-commerce. Our digital transformation often include cloud sectors, analytics, machine learning, artificial intelligence, data and speech analytics, robotic process information, IoT and sales force. We continue to be our arrowhead for growth.
On cloud, we work on all the leading platforms such as Amazon, Microsoft Azure, Google. We are advanced partner with Amazon and Gold partner with Salesforce. We see significant traction in the cloud space and sales force. These are the growth areas for us. In analytics, we see high growth in ML and AI, data and speech analytics. We are currently serving many existing clients in this space and many proposals are in progress.
On mobility, we do a wide variety of technologies such as Android, iOS, hybrid and web apps, right from application, simple app to enterprise large application. We had 8 wins during the quarter. And brief of the few key wins are under our product life cycle management, a global leader in IT security solution in U.S. has engaged R Systems for their digital transformation partner to provide product engineering service in their security — network security product development. Another customer is a U.S.-based health care technology solution provider. They engaged R Systems to help digitize their core applications [Indecipherable] for their various customers in EMR, EHR, customer onboarding, et cetera.
Another is a Canada-based organization that provide roadside assistance, insurance and related services, they have engaged R Systems to one of their customer retention using ML and AI technologies and we are using AWS model for that. Another one, one of the leading telco ISV and our existing customer mandated R Systems to develop a real-time data audit tool to select and reconcile data from various sources and take corrective measures. In Southeast Asia, a significant leading wine distributor has awarded R Systems to upgrade their Microsoft NAV application to Microsoft Business Central and implement LS retail to automate with various business operations.
In terms of headcount, we increased from 3,548 in year ’21 to 3,874 in year ’22, added 326 technical associates during last year. Our utilization was almost flat at 77% in CY ’22 of last year, we had attrition challenges over last year. However, some softening of attrition challenges are happening now. We are making continuous focus and effort to improve our utilization and reduce or attrition. On a yearly basis geography, North America contributed 74.2%, Europe 10.4%, Southeast Asia, 12.5%, Rest of World, 2.9%. On a yearly basis, client concentration, Top 10 client contribute 22.8%, with the largest client above 6.7%.
With that brief overview, I’ll hand over back to Dr. Rekhi for his closing comments. Over to you, sir.
Satinder Singh Rekhi — Managing Director & Chief Executive Officer
Thank you, Avirag. Our performance in CY 2022 is encouraging in terms of revenue growth. However, the margins are shy due to salary hikes and muted utilization. We are committed to get profitable growth through operational efficiency, better price realization, coupled with pyramid rationalization in coming quarters. Further, we have taken focused efforts for getting larger deal sizes to strengthen the margin. Rupee at present level against USD will also support us to improve our margins.
In the last few months, we have seen demand softness amid weakening macro environment. It may affect our high-growth momentum for certain periods. However, we are still optimistic for continued traction for technology and digital services. We continue to invest in sales, pre-sales, digital marketing and in newer technologies, and these are helping us to win larger digital transformation projects. We endeavor to utilize our strong balance sheet to support operations and growth.
And that brings us to the end of our presentation today, and we’ll hand you back to the organizers for your questions.
Questions and Answers:
Operator
Thank you very much, sir. We will now begin the question-and-answer session. [Operator Instructions] We have the first question is from the line of Abhay Jain, an Individual Investor. Please go ahead.
Abhay Jain — Individual Investor — Analyst
Hi, good morning. First of all, thank you for the detailed presentation on the results. I just want to know the detailed factor which is driving your margins downwards since 2020? And what are you aiming to improve that?
Nand Sardana — Chief Financial Officer
Thank you, Mr. Abhay. So, let’s see the history of margin. In 2020, we reported 13.3% of EBITDA margins, in ’21 year-ending, we did 14%, with a slight reduction in percentage term in 2022 to 13.7%. Well, the percentage term, the EBITDA margins have reduced by 30 basis time. In absolute term, it has increased by almost 29%, 30%. So, the margins have improved. While the margins have reduced in percentage term, I think it’s an industry-wide phenomena and I think a lot of other companies are also facing that. There were a lot of pressure on salary hike this year. Our average salary hike increased and along with that, because of that high attrition to maintain the attrition levels, we had to do a higher percentage and resulting into higher average services.
Having said that, the situation has improved in last quarter or last 4, 5 months, and we see less pressure on increasing salary. So, we are quite hopeful of improvement in EBITDA margins going forward. And our endeavor is to do 300 basis point improvement but let us see. So hopefully, and you see, we have done a lot of efforts in improving the bill rates. So, that bill rate improvement, which has already done. In fact, last year, close to 4% improvement in bill rate we did at least in our offshore centers. So that will also help us to kind of focus on margin. Rupee also had helped last year, which has kind of had us to keep margins and we are hopeful that Rupee will continue to help us on that as said. So, that is on — but we are quite hopeful to increase EBITDA margin.
Abhay Jain — Individual Investor — Analyst
Okay. Thank you. I think that answers my question. Can you also give some update on the open offer of Blackstone? Currently, at which is open offer and when it will get open?
Nand Sardana — Chief Financial Officer
Well, so just to reiterate, Blackstone has signed a definitive agreement with promoters of the company around sometime in mid-November, I think 17th November, the agreement was signed. It is a delisting cum open offer for which the necessary formalities are underway. Blackstone has filed the letter of offer with SEBI, which is pending approval right now. So, we don’t know when the SEBI will approve. But based on my discussion, I see that we should be getting the SEBI approval soon.
So, we are not sure when it will happen. Once the SEBI approval comes, I have a feeling it is three to four, 4.5 week process to conclude this delisting cum open offer. There are some conditions and all that. I don’t want to get into all these things. But once the SEBI approval comes, which is at — I don’t know when it will come, but should be coming because almost more than three months it has been filed and after that, it is like around four weeks process. So, that is update on that.
Abhay Jain — Individual Investor — Analyst
Okay, thank you. That’s all. Thank you.
Operator
Thank you. [Operator Instructions] We have the next question from the line of Jagdishwar Toppo from Japa Investments.
Jagdishwar Toppo — Japa Investments — Analyst
Yeah, good morning, sir. I have a question regarding your telecom vertical in Europe. If I take you through the Slide 9 of the presentation, the Europe business was 13.2% in 2020, it was 13.5% in ’21. It has dropped down to about 10.4% in 2022. So, our telecom vertical in Europe are supposed to get into telecom, 5G rollout-related opportunities. So, what are the challenges that we are facing and how do we plan to overcome those challenges? Do we have any strategies to get through this telecom business? And what percentage of revenue you intend the telecom business in Europe could contribute, let’s say, in three to four years’ time? This is my first question.
Nand Sardana — Chief Financial Officer
Thank you, Mr. Toppo. I’ll answer the question on the numerical part and the telecom vertical and the qualitative part I leave it to Avirag Jain to answer, but let me first answer your percentage part. You see we have grown in all the units, but our growth in U.S. and Canada territory has been much faster than compared to the Europe. So that is a broad high-level reason that the percentage of North America business has grown to more than 74%. And accordingly, the percentage of Europe and Southeast Asia has fallen down. That’s the reason for the percentage.
About telecom strategy, Avirag maybe you can just answer that question.
Avirag Jain — Director & Chief Technology Officer
Telecom, telecom is one of the key verticals that we have. And we have increased our sales to Europe and we’ve aligned our sales to U.S. as well. I think all of you know [Indecipherable] is one of the largest customer, we have other customers. So, that can continue to be our focus. With 5G rollout coming across the globe, we see a lot of opportunities and our team facing a lot of I think substantial deals that we are working at. So, we see good growth coming from there.
Jagdishwar Toppo — Japa Investments — Analyst
So, any ballpark number that you may have, which you intend to…
Avirag Jain — Director & Chief Technology Officer
I don’t think we can really give numbers like this. Maybe one doesn’t believe in them.
Nand Sardana — Chief Financial Officer
Sir, telecom is a focused vertical. It will continue to grow. I mean the percentage maybe, I think, on the telecom front, see right now, you’re talking about the Europe part. But if you see on the telecom and there are two point of — part of telecom business. One is that ISV part and second is the enterprise part. The overall telecom as a vertical has been growing. So, the — so that is kind of — we will continue to grow.
Jagdishwar Toppo — Japa Investments — Analyst
I have one more question. It is regarding the cash flow, consolidated cash flow statement. You should go to consolidated cash flow statement line item — line item on spending, I see, property, plant, equipment, there is INR35 crore cash outflow. So, I see some infrastructure increase in terms of square foot area. So, my question is how much of this is in terms of infrastructure and increase in seat and how much of this is in renovation or modernization of your existing IT system and processes?
Nand Sardana — Chief Financial Officer
So Mr. Jagdishwar, we have done CapEx of close to INR34 crores in 2022. So, all this has been increased mostly in computer purchase, networking equipment and modernize the infrastructure. To answer your question, how much is for the exact CapEx and how much replacement. Maybe I can answer this question offline to you or maybe send you a — I have your phone number, I’ll send you information on that. Broadly INR35 crores is the CapEx spend during the year 2022. This is in line with our — we have grown close to 30% last year. So, this is in line with that.
Avirag Jain — Director & Chief Technology Officer
Also to add on this, we have expanded our SEZ footprint by 50,000 square foot, which was you can say executed this year. So, a significant part of CapEx belong to the infra expansion in the SEZ, we have taken 50,000 square foot over this year.
Jagdishwar Toppo — Japa Investments — Analyst
The next line item in that cash flow item, its payment of contingent consideration to erstwhile [Phonetic] shareholder of subsidiary. It’s about roughly about INR3 crores, small number. So, there there’s a minority shareholder of the subsidiaries. Is that the reason why this cash outflow item is coming in? I reckon that all the subsidiaries were 100% sub. So, why this item — line item is coming?
Nand Sardana — Chief Financial Officer
So, let me explain to you. So if you recall, in 2019, we acquired a company by the name Innovizant, okay. So, we had deals with them. So, what we did was that there was an upfront payment and then some money was to be paid for next three years. So, we have made the final settlement and close to $400,000 or $380,000-something was paid including final settlement of the acquisition which we did in 2019, that was for Innovizant, a Chicago-based company. So, that is the payment for that. That is paid in full and final.
Jagdishwar Toppo — Japa Investments — Analyst
Okay, got it. Which has been paid this year.
Nand Sardana — Chief Financial Officer
Now, it’s full and final payment. That’s right.
Jagdishwar Toppo — Japa Investments — Analyst
All right, sir. Thank you so much. And my best wishes to the senior management and all employees. Thank you so much.
Nand Sardana — Chief Financial Officer
Thank you, Mr. Jagdishwar.
Operator
Thank you. [Operator Instructions].
Nand Sardana — Chief Financial Officer
If there are no further questions, we can close.
Operator
Okay, sir. Thank you. As there are no further questions, I would now like to hand the conference over to Mr. Rekhi — Dr. Rekhi for closing comments. Over to you, sir.
Satinder Singh Rekhi — Managing Director & Chief Executive Officer
Thank you very much. I want to thank all of you for attending this conference and for your participation and questions. With this, we come to the close. Thank you very much.
Operator
[Operator Closing Remarks]