Q2-FY24 con call notes

Market Focus and Strategy

• Geographic Focus: Targeting customers in the US, Europe, and Australia, with an emphasis on advancing market penetration.
• Deal Success: Over 2/3 of deal wins are coming from advanced markets.

Distribution Market Shift

• Collaborating with major consulting firms such as EY, PWC, Deloitte, McKinsey, and BCG to influence board-level decisions.
• Engaging with seven strategic partners, including HCL Tech, Wipro, and Accenture.

Recent Developments

• Signed a $3 million deal in early October.
• Microsoft has recognized the company as one of the top five financial service providers.
• Anticipating an increase in sales costs in the upcoming quarters.

Pipeline and Revenue Growth

• Intellect currently has 18 deals in the pipeline, each valued over $3 million. Converting 6 or 7 of these in the next two quarters could lead to over 20% growth.
• In the next three quarters, at least one quarter should generate over 700 crore in revenue, potentially resulting in over 100 crore PAT.

Product Strategy

• Embedding AI into various products serves as an entry point for customer engagement, followed by building a narrative around microservices.
• Aiming for application rationalization, consolidating customer applications (e.g., from 30 to 2 or 3) without requiring core system changes, which is a significant value proposition for clients.

Seasonal Trends

• Historically, Q3 and Q4 are stronger quarters, especially as we pivot toward US and European markets.
• The US market has been a focus for the last two years. To achieve our $1 billion revenue goal, $300 million should come from the US, prompting the development of eMach.ai to enhance US market focus.

Partnership Strategy

• Looking to establish deep relationships with clients, particularly among the top 100 global banks over the next five years.
• Beyond the top 100 banks, we are also targeting 1,000 additional banks and insurance companies, with a goal to earn over 20% of revenue from partnerships within three years.

Core Banking Insights

• The GCB Europe segment represents a small portion of our overall revenue, expected to contribute around 25% in FY25.
• Competing effectively with companies like Temenos and Thoughtworks.

Insurance Sector Focus

• Our insurance strategy is fully concentrated on the American market, with approximately 300 leads, primarily in subscription-based models.
• We have around 25 customers in the US. Due to our scale, some clients have expressed interest in acquiring upfront licenses.

My Take:

• This quarter exemplifies a recurring situation in which product sales do not materialize, leading the management at Intellect to depict a narrative of missing or delayed sales for certain products. Such delays occur with such frequency that it becomes impractical to concentrate excessively on quarterly figures beyond a certain threshold; however, management continues to emphasize this issue repeatedly over the next four to five quarters.

• Furthermore, management places considerable emphasis on achieving a compound annual growth rate (CAGR) of 15-20%, which may appear acceptable from a year-over-year perspective but does not translate effectively into quarter-over-quarter results. The second quarter was illustrative of this trend.

• Management often adopts an optimistic tone, and should they exceed sales of 700 units within the next three quarters, as Mr. Jain indicated, they would offset the loss in profit after tax experienced in the second quarter.

• Intellect is making strides in the U.S. market; however, their performance regarding Banking and Transaction products—central to their operations—has been less impressive. While their progress in Insurance is satisfactory, its profitability relative to core banking products remains uncertain.

• I express caution regarding their approach to System Integration (SI). They have partnered with major SI companies such as IBM, HCL Tech, Wipro, and Accenture. Unless these firms generate revenues between $30-$50 million through their partnership with Intellect, significant commitments are unlikely. Since many of these SIs are joining simultaneously, it will be intriguing to observe how these collaborations evolve. Ideally, Intellect should have initiated partnerships gradually with a select few SIs before expanding further; instead, they opted for a more aggressive strategy. On a positive note, some of these SI partnerships could yield substantial benefits outside the U.S.
  For instance, HCL Tech acquired IBM’s product portfolio four to five years ago and has since established client relationships in over 100 countries. Intellect can undoubtedly enhance its reach through these extensive distribution channels. If Intellect succeeds in improving its sales via SIs, significant margin improvements could follow; however, this will likely involve increased costs over the next two to three quarters.

Is the capex completed/completed partially?
If yes why hasn’t the cwip amount converted to fixed assets?

Results are quite lukewarm. CDO/CDMO business has been slipping down further and not sure if management will be able to scale that up. It’s not an easy business and very few in India have been able to establish presence in this space.

Only bright spot was margins that picked up this quarter but still doesn’t compensate flat topline.

Disc- Small quantities received from Aarti Industries merger. Keeping for tracking purpose as I’m also interested in their CDO/CDMO play.

Good results IMO.