NIIT Ltd

NIIT CLG Business (NIIT MTS) first ever concall as a separate entity.

Summary

Story in numbers

On the quarter gone by
• Financials for Q1 include the impact of the acquisition of St. Charles Consulting Group, which the company had acquired in November of 2022. Excluding the contribution of St. Charles, the organic revenue was up 1% YoY and was flat QoQ.
• The revenue growth has been impacted in the near-term due to compression in spending by our existing customers due to the prevailing uncertainty in the environment;
• Despite the growth in EBITDA, the PAT has remained the same as last year. The increase is offset by certain non-operational and transitionary expenses included in depreciation, amortization and net other income.
• When announcing the annual results for last year, management expected the first half of the year to be flat and our results are in line with that stated expectation
• Management expected an acceleration in deal velocity and that is also visible in the customer addition in Q1 as well as having a robust pipeline of new customer additions and renewals for Q2.

On Deal wins
• The new deal momentum and pipeline for the first quarter remain strong. The company added four new MTS customers during Q1. This is the second successive quarter in which we’ve added four new customers.
• Out of the four new customers added, one is top-10 pharmaceutical companies and one is top-five retail bank in the US. The other 2 are in BFSI and aviation space
• Revenue contribution from new customers - It takes about four to five months for a new customer to ramp up to a reasonable revenue level, and then it takes about 18 months to get to cruising speed.
• Ramping up of a new customer does require investments. We bring people on and training the people and getting them ready for the work ahead of the revenue starting. There will be some pressure on margin, every time we have a transition, especially for large customers.

On Acquisitions
• Investment in inorganic growth has helped the company break into key industry segments that we wanted to get in.
• With Eagle Professional Services, we’ve been able to get into the life sciences segment and now we have five out of the top 10 pharmaceutical companies as our customers.
• With the acquisition of St. Charles, we have deeper penetration into professional services market segments where we know that the spend on training for employees is almost double the average across industries. St. Charles Consulting was highly distinctive advisory and consulting services across the wider customer set that NLSL has.
• The company announced a strategic investment in InnoEnergy of Euro 3 million and opening new customer segments in the areas of renewable energy and higher education.
• Acquisition strategy - We look for market segments that we are not serving today and how can we add those. And the third is geographies,where we do not have the strength that we need to grow market share.

On FY24 outlook
• It is taking a little longer to rebound the spend on training services as compared to what was expected.
• Outlook is challenged in the near term as the positives of adding new customers at an accelerated pace is being offset by the compression in spending across existing customers. This is reflected in the flat quarter-on-quarter growth that we saw in the previous quarter.
• We expect to start seeing sequential growth returns in H2, driven by continuing new customer additions ramp up and stabilization as spending rebounds in our existing customers.
• Given the delayed recovery in consumptions, we now expect mid to high-teens on year-on-year growth for FY24 in constant currency. This is a revision from our earlier forecast of 20% growth for the year
• From Q2 perspective, we expect flat Q2 with respect to revenue and Q2 margin is likely to be in the 22% range. Customer sentiment is not showing signs of recovery yet but no deterioriation either.
• On 20% margin guidance (current is 24%) - We didn’t say there is going to be 400 basis points compression in the margin. We had indicated that the expectation should be greater than 20% margin and we are staying with that expectation, we don’t expect it to go down to 20%.
• One more thing to keep in mind, typically when we have a renewal during any quarter, there is a step jump. There are a number of renewals due in Q2, but there were none which happen during Q1.