– Black Box: Building infrastructure for the AI revolution

Introduction

I recently came across this tweet by Abhishek Basumallick (@a_basumallick) that highlights the significant role of IT infrastructure in the world of AI.

One such under-researched and under-owned (FIIs & DIIs combined, own <5%) IT infrastructure company in India with global presence is Black Box Limited.

Originally a US-based company listed on Nasdaq (NASDAQ: BBox), Black Box faced financial troubles and was acquired by AGC Networks Limited (NSE: AGCNET), owned by the Essar Group, in 2019 for about $16.6 million (Rs. 121 crore) in cash. At the time, Black Box had revenues of $656 million, while AGC had revenues of $100 million.

Following the acquisition, AGC Networks renamed itself Black Box Limited, adopting the identity of its larger acquisition to establish a global presence. The company moved its backend operations to India, significantly reducing employee costs. This transformation helped streamline operations, reduce costs, and improve both gross and EBITDA margins, leading to significant improvements in the company’s bottom line.

Source: Screener.in

💡 Management on acquisition:

”Black Box prior to acquisition was not doing well, I think there were a lots of cost, a lot of systems within ERP systems, a lot of debt on the books. We took an approach of downsizing the overlay costs close to $10 million to $15 million. We have focused on procurement to ensure that we centralize the large part of the procurement to get efficiencies. We have also negated our subcontracting costs to see the variable to get a leverage.” [Q1FY23]

”We acquired the company, which was struggling that time in terms of overall operating environment and all those things. So we have transformed the company by doing various things. So when we acquired it was at a negative EBITDA then we transformed it by streamlining all the overheads in the company, where we have revisited each and every overhead and that every overhead was streamlined as a percentage to the revenue and also to see that the unnecessary overheads go out of the company. And then we have also worked in terms of in terms of improving the productivity in the company by putting a ratio centric approach where the ratio centricity will become a prime in terms of all the productivity in the company. In that process, when we acquired the company in January ’19, so between February ’19 to June ’19, we have let go close to around 225 people from the company without impacting any revenues, without impacting any customer experience and all those things. And that time, the focus was to maintain the revenues at the same level, don’t chase the growth, but chase that to streamline the company profitability. And that’s what I think we have been able to do successfully in next four quarters.” [Q2FY23]

Today, Black Box serves major clients like Meta (Facebook), Amazon, Microsoft, Google, Intel and Bank of America among others. The company counts 250+ of the Fortune 500 companies and 3 out of 5 hyperscalers in cloud technology among its customers. Meta alone accounts for over $100 million in annual revenue.

💡 Management on its customers:

”we serve few of the marquee clients, in the technology Cloud space, we work with customers like Facebook, Amazon, and Google. From a technology, customer standpoint, these are sort of the Top 5 technology companies including Intel, and others. From banking perspective, we serve some of the largest banks in the U.S. like Bank of America, so these are some of our marquee clients.” [Q1FY23]

”We currently account 3 out of the 5 hyperscalers/cloud/social media company as our customers and are happy to state that we are well on our way to add a second $100 million customer account in this space with significant project wins from largest social media giant (Meta) in Fiscal 23.” [Q4FY23]

Since the acquisition in FY19, Black Box has consistently delivered growth and improved margins. Management projects $2 billion in revenue within the next three years, with 10% EBITDA margins. For FY24, the company reported $756 million in revenue with an EBITDA margin of 6.8%. Company today has a market cap of little less than $800 million.

Black Box has two $100 million+ accounts and is strategically shifting to increase its share of large corporate clients while reducing its focus on smaller, less profitable ones. This approach aims to reduce long-tail costs and lower SG&A expenses and enhance profitability.

Acquisitions seldom succeed in delivering promised synergies, but Black Box is a rare success story!

More about Black Box

Black Box is a global digital infrastructure integrator offering connectivity and network
solutions, data center solutions, modern workplace and cyber security solutions and technology products to businesses globally across 35 countries in North & South America, Europe, Middle East, Africa, India and Asia Pacific regions with 85%+ business coming from North America.

According to Frost and Sullivan in calendar year 2023, Black Box is one of the leading solution integrators globally and in the US market with strong services offering in network integration, unified communications, collaborations, cyber security, digital infrastructure for connected buildings, data center solutions as well as AV solutions.

Black Box operates in two main verticals:

Global Solutions Integration (GSI): In the GSI business, Black Box consults, designs, deploys, manages, and secures digital technology infrastructure for global customers. Their services include connected and smart campuses, digitalizing workplaces, data centers, ad networks, wireless and mobility solutions (including 5G and LTE), and cybersecurity. The GSI business contributed 86% of the total revenue in FY24.
Technology Products Solutions (TPS): In the TPS business, Black Box sells and distributes technology infrastructure products to enhance customer experience through various channels such as online web platforms, distributors, integration partners, and value-added resellers. The TPS business contributed 14% of the total revenue in FY24.

💡 Management on its role as a IT infrastructure player:

”Meta is one of our largest customers and growing in the real infrastructure kind of building space. For specific part of the data center, we are responsible for providing network infrastructure, both passive and active, starting from the fiber when the telecom operators leaves the fiber, up to the rack, which is the digital infrastructure, the wireless infrastructure inside the data center and that dash infrastructure that allows for your mobility communication inside a very large infrastructure.

So, we are a network provider, which is the backbone or the highway on which the applications run. In doing that we provide the fiber communication infrastructure, the passive infrastructure, the cabling infrastructure, the connective infrastructure of the active network, the wireless network inside the data centers, going up to the racks. So, that’s what we do currently. We are slowly and steadily progressing up the value chain within the client, it’s one of our largest clients. It’s been a five year relationship now. And we are growing. And we expect to do more share of wallet within Meta as we move forward.” [Q1FY23]

”We are not truly a offshore company, that’s how the IT service company came in. We are infrastructure, digital highway creator. And it’s important for us to remain local where the infrastructures are built. And at the same time, our ability to serve our global clients where their business takes them is important. So therefore, we call ourselves as a glocal company, think globally and act locally.” [Q2FY23]

Does Management Walk the Talk?

The company started hosting analyst concalls from Q1FY23. During this period, management guided for consistent 15-20% business growth and an expansion of gross and EBITDA margins, leveraging cost-cutting strategies by shifting work to a low-cost territory in India and improving per employee efficiency.

💡 Management on strategy to improve margins:

”We have opened up the Centre of Excellence, in the last 12 months and we are ramping that up. Also some of our backend processes, specially shared services in Finance, the Support Center for our North operations and other shared services have been gradually being moved to low cost geographies like Bangalore and Mumbai. So, we will continue to focus on that. And we expect to ramp that up over the course of the next 12 months’ time, adding at least 300 odd personnel in our people portfolio in low-cost geographies like India. And we expect that it will be margin accretive between 100 and 200 basis points as far as creating efficiencies of people working out of India or any other low-cost geographies is concerned.” [Q1FY23]

Throughout FY23, management consistently projected Rs. 6,000 crores in revenue and significant margin improvements in every concall.

💡 Management guidance across FY23:

”On the medium term basis, the Company aims to increase market penetration in the existing geographies and add new clients. By 2024, the Company expects revenue to cross Rs. 7,000 crores, and achieve an EBITDA margin in the range of 9% to 10%.” [Q1FY23]

”So on the revenue side, we are currently at an exit run rate of close to INR 6,000 crores. I think my CFO just alluded to the last quarter number, about INR 1,500-odd crores. We expect to continue to grow at 10%-15%, and that should be take us to a revenue target of about INR 7,000 crores exiting FY ’24. We feel reasonably confident that we should be able to drive that revenue growth at the back of our demand and pipeline that we see going forward. With respect to our margin, as I said, our goal is to improve our gross margin by 200-300 basis points through the activity that we are doing, that’s one. We also expect our overall percentage of SG&A as a revenue to kind of shrink at increased growth. So, we’re expecting 300-400 basis points of growth in terms of margin over the next 12-18 months’ time. And that should put us in the range of about 9%-10%. So we’re reasonably confident about that.” [Q2FY23]

”By fiscal ’24, the company expects the revenue to cross INR 7,000 crores mark and achieve EBITDA margins in the range of 9% to 10%.” [Q3FY24]

”We remain optimistic about sustaining the profitability momentum. We are confident of remaining within our stated EBITDA and PAT guideline range for the year.” [Q3FY24]

”Our order book, if I heard earlier, our new project order book stands about $209 million just for the US. There’s been the highest ever. It is about three times more than what used to have in fiscal 21. So therefore I think our revenue guidance, we are confident of the range of 7,000-7,500 crores.” [Q4FY24]

Black Box delivered on its promises, recording revenue of Rs. 6,288 crores in FY23, representing a YoY growth of 17%. EBITDA margins improved from 3.9% in Q1FY23 to 5.6% in Q4FY23. The management successfully adhered to its guidance for FY23.

Source: Q4FY23 Investor Presentation

Management Guidance across FY24:

”As we grow from here our yield of margin is expected to get better progressively quarter after quarter. So, now the answer is we have more juice left. We would expect to go to 7%-8%-9%-10% operating margin progressively and there is enough to be done here. [Q1FY24]

On how the margins will increase – So, there are 3-4 factors. Number one of course growth itself is a factor. We expect to grow reasonably in mid double digits. So, when we grow, we expect certain of our fixed costs to get amortized in a better manner. Fixed costs are not linear in nature so therefore it wouldn’t go. So, that’s one. The second of course we’re expecting our global delivery model to mature better as we move forward. And that comes at a slightly lower cost for us, so therefore better margin. As we scale up from here, we expect some efficiency with respect to our procurement strategy as well which will allow us to get some traction on that. And as we build scale from there, we are still in the process of working through, implementing and focusing on our service now and ERP systems, allowing us to serve our back office in a more robust manner from offshore. So, a mix of growth, a mix of ability to deliver from a global delivery model, our ability to procure better on scale and more productivity or more offshoring initiative that we have left to do over the next couple of quarters. A combination of these four gives us a good chance to start to move that 6 more towards 9 and double digit figure progressively over the next several quarters. [Q1FY24]

We are confident of our guidance pertaining to this year to EBITDA targets which is northwards of INR 400 crores to INR 450 crores. We are confident of our guidance give for PAT northwards of INR 140 to INR 170 crores range. [Q2FY24]

We remain optimistic about sustaining the profitability momentum. We are confident of remaining within our stated EBITDA and PAT guideline range for the year. [Q3FY24]

However, in FY24 Black Box faced headwinds from customers, leading to delays in execution and lackluster topline growth. Revenue for FY24 remained flat at Rs. 6,282 crores, falling short of the Rs. 7,000 crore guidance. Despite these challenges, management achieved its promise of enhanced gross and EBITDA margins. EBITDA increased by a robust 59% YoY to Rs. 428 crores, with EBITDA margins growing by 250 bps YoY to 6.8%. Although the PAT guidance for FY24 was missed slightly due to higher than anticipated finance costs, profit after tax increased by 5.8x YoY to Rs. 138 crores, just shy of the lower end of the guidance of Rs. 140 crores.

Source: Q4FY24 Investor Presentation

In conclusion, despite encountering some execution delays and missing the topline guidance, Black Box successfully delivered on margin improvements and demonstrated significant EBITDA growth, showcasing the effectiveness of their strategic initiatives.

Future of the business

Black Box’s transformation is driven by two key strategies. Firstly, the company is increasing its wallet share with large customers by letting go of smaller, less profitable ones, allowing it to better focus on and grow its order book with major clients. Secondly, it is further enhancing margins by negotiating better contracts and effectively managing costs through the utilization of low labor costs in India.

Growing order book –

Black Box has consistently expanded its order book over the years. Management remains optimistic about future growth, citing ongoing discussions with customers that are nearing $2 billion. Management is confident of achieving consistent double-digit growth, driven by the rapid adoption of new technologies like AI and 5G.

Year Order Backlog (US$ Mn) YoY Growth

Mar 2021 87

Mar 2022 148 70%

Mar 2023 209 41%

Mar 2024 470 125%

Year	Order Backlog (US$ Mn)	YoY Growth
Mar 2021	87
Mar 2022	148	70%
Mar 2023	209	41%
Mar 2024	470	125%

💡 Management on order pipeline:

”And our pipeline, of course is very strong, specifically in our networking and our
data center solutions business. It’s close to $2 billion at this time.” [Q4FY24]

”We expect our deal pipeline from the data center business or the data center led customers to continue. We have increased our focus. We have doubled down in that space. We have hired talent, hired management in that space. From local we’re getting global and so that will continue in that space. The other few areas that I said before that we expect hyper growth are connected to data center. When you build a data center, you require the network. The network could be a wired or a wireless network. Now it could be a 5G or a Private LTE network right. Once you build the network, then you have to secure the network, right? Because as we all know, there is a lot of cyber going on and our company is focused on doing that as well. So the areas of connected and smart buildings, which is a very generic term for intelligent buildings, which as we all know, even our private homes are getting intelligent. So these are all connected, so data center networking, wired or wireless, including now 5G and Private LTE for the enterprise side, security and anything that drives IoT in our connected building space. So I think all these are digital infrastructures all enabled to build highway on which the future of tomorrow will run right. similarly all corporates, all enterprise, countries, if you may need to be rewired for the new generation of AI and ChatGPT and ML coming in because they have to travel over that digital highway and that is what Black Box is focused on building those intelligent networks infrastructure and we believe that the next 3-4, 5-7 years will see massive growth and explosion in rebuilding the network for tomorrow.” [Q4FY23]

”Two of our other the four portfolios, the two portfolios are super growth, more specifically, cloud infrastructure, data center, and refreshing of the network from the legacy network to software defined network to 5g and so on and so forth, which you’re seeing even in India or any part of the world. And that’s those two pillars are very, very strong pillars for us. So we will expect that for, slighter growth, very large part of a pipeline, for example, our data center business pipeline was $200 million or $300 million, a few quarters back stands at about a billion dollars now. So at the back of our pipeline, the leading indicator, the conversation we are having gives me an optimism for double digit growth going forward in the fiscal’25.” [Q3FY4]

“We have seen our pipeline in that space grow significantly. We expect those will mature over the course of the fiscal ’25. So therefore, I think we see a huge opportunity and we are bullish on our approach towards data center.” [Q4FY24]

Increasing wallet share of large customers –

Black Box is currently evaluating its customer base, focusing on yields and potential growth. The company aims to optimize profitability by either increasing prices for low-yield customers or exiting those relationships if the potential for growth is minimal. The company is gravitating towards high-value customers, which is expected to have a positive impact on margins, gross margins, and overall profitability.

Black Box is also working with other top cloud providers, aiming to elevate these relationships to the $100 million level. Black Box has achieved $100 million in revenue with its latest customer in just 24 months, compared to the 10 years it took with the first customer. This marks the company’s second customer generating over $100 million in revenue. This achievement highlights their increased efficiency in expanding high-value relationships.
Black Box is also working with other top cloud providers, aiming to elevate these relationships to the $100 million level. Black Box has achieved $100 million in revenue with its latest customer in just 24 months, compared to the 10 years it took with the first customer. This marks the company’s second customer generating over $100 million in revenue. This achievement highlights their increased efficiency in expanding high-value relationships.

💡 Management on Increasing wallet share of large customers:

”we are currently assessing customers over the last three years period, assessing
the yields from the customers and possibility of what we can do and this is we are taking measures to ensure that we take prudent measures that we do not see a possibility or we see very small customers and the possibility not high to take a measure to either increase our prices to be to get the better yield or not able to handle that we want to exit those customers.
We do not expect that to be a large drag on our revenues. It might be mild, in fact, it would be a positive impact to our margins, gross margins and profitability going forward. That assessment is going on at this time and as we make progress, I think we’ll take optimal measures to gravitate towards high yield customers, high value customers and if we do not see prospects from long tail, we will take appropriate measures to see that we are able to either increase our value in the customers or if not, we have to exit those customers.” [Q2FY24]

”On gaining wallet share of Meta: So we started very small, just post the Black Box getting acquired, we acquired Black Box in 2019-2020. And of course I think the opportunity was participating in their massive data center buildouts. As you know, Meta/ Facebook, WhatsApp, Instagram are part of the same group, right and they’re consuming more data centers, you know, than they can build and we saw that the possibility. And I personally mentor that account because was a sponsor from Black Box, visiting their leaders very often and sitting in quarterly reviews. So currently we are providing physical network infrastructure to Meta data centers, both passive infrastructure, structured cabling and active infrastructure with respect to building up their wireless and that network inside their campuses, we expect we had only one site. Over the period of the last 2-3 years’ time, we are managing multiple sites in North America. We’re managing sites in Europe. We are currently engaged in managing many more sites worldwide. So that’s on the going deeper on what we do. Going wider, we expect to sell or to participate in other areas of Meta’s technology purchases and it could be their command centers, their audio video requirements, their building management networks, so there are opportunities there as well. It’s a large account. It cannot happen overnight, but we have a very focused team engaged with likes of Meta locally and globally and we have grown the pipeline from few million dollars 3 years back. We expect it to add up to close to $100 million as we speak. And similarly from our top customer perspective, we’re also working with other cloud providers in that space. The top five, we currently have small with them with few million dollar worth of projects locally, but we are focused on building the third customer in that space, we are getting into $100 million, right. So that’s and we have created our teams. And practices around building those focused approaches with our large customers. We serve many of the top banks. We serve large cloud providers, we serve very large pharma companies. So we have a good spread of accounts that has the requirement for what we provide as solutions and we are seeing how do we increase that share of wallet, increase that heat map in every account by a very sharp, focused account management, good executive sponsorship, bringing capability and I think those are the areas, those are the
strategies that we are deploying to see that we are able to gain scale and more share of wallets from some of our top customers both in North America and other parts.” [Q4FY23]

”I think we have gained the trust with the new customer joining the $100 million club in the last 24 months. That took us about 10 years with the first customer, the second customer just taken us close to 3 to 4 years’ time. So, the pace is faster.” [Q1FY24]

Continued improvement in margins –
Management remains bullish on operating margins, consistently guiding for continued improvement. Over the next 2-3 years, they project margins to increase from 7% to 9-10% on the back of double-digit revenue growth. This margin expansion is expected to drive a disproportionate increase in operating profit.

Management on Long Term Margin Guidance:

”I think we are over the next several quarters we intend to improve our operating margins and heading towards more towards 8%, 9% and 10% goals. I think that’s what our objectives are. For the next three years’ time, we do expect to be exiting upward of 9% closer to 10% and I think with scale we believe that is the possibility for sure whether we can do much better than that the time will tell, but for now, over the next two years to three years’ time, we expect to move from 6.5%. I think we expect to exit this year northwards of 7%-7.5% and therefore I think we expect over the next couple of years to be able to go to the 10%.” [Q2FY24]

“so we have 3-4 levers to focus on margins. So I think one of course is our ability to sell better, renegotiate our contracts when it comes up for renewal, which we are doing. The second of course, our ability now to have our Center of Excellence in India support us because it’s mature now we put the investment for the last 2 years time. So, we are able to get better productivity from our Center of Excellence in India that allows us to have better margin. Third, of course, our better relationship with our technology vendor partners allows us to negotiate better. And we are focused on ratio centricity across our various cost blocks, both from a cost of goods perspective, our G&A perspective. So therefore, a combination of selling and negotiating better contracts, ability to get better productivity from our Center of Excellence in Bangalore, India, which is now maturing, and also our ability to negotiate better terms with vendor partners and start focus on our G&A cost. A
combination of all this has helped us to expand our margin, as Deepak said, by over 250 basis points.
We expect that momentum to continue. Our goal is to reach about 10% operating margin, and we are clearly focused over the next couple of years to get there.” [Q4FY24]

Financials

Link to financials – Link

Valuation

Time and again, management has emphasized in concalls that their business represents non-discretionary spending for customers, ensuring strong pipeline visibility.

Conservatively assuming management can achieve a modest 15% topline growth for the next three years—reaching Rs. 9,500 crore (against the guidance of $2 billion)—and increase EBITDA margins to 9% (against the guidance of 10%), compared to Q4 EBITDA margins of 8.2% and full-year FY24 margins of 6.8%, EBITDA would increase to Rs. 855 crore, doubling from EBITDA of FY24.

💡 Management on $2 billion guidance:

”we would be looking for maintaining or growing our growth momentum in double-digit going forward, targeting towards being above growth of being a $2 billion over the next three years’ time.” [Q3FY24]

In Rs. Crore	FY24	FY25e	FY26e	FY27e	FY27e – Mgmt Guidance
Revenue	6,282	7,200	8,300	9,500	16,000
Growth%		15%	15%	15%
EBITDA	428	576	705	855	3,200
EBITDA Margin	6.8%	8%	8.5%	9%	10%
Growth%		35%	23%	21%

As of 3 July, 2024, Black Box has a market cap of Rs. 6,300 crore and an enterprise value of Rs. 6,474 crore. It is currently trading at 15x trailing EBITDA and less than 7.5x FY27e EBITDA. (This is after the stock price is up 45% in last one week, without any news!)

These projections are relatively conservative and present an upside potential.

If management achieves its guidance of $2 billion (~Rs. 16,000 crore) in revenue and 10% EBITDA margins, the stock’s performance could be extraordinary.

Black Box could be an ideal investment, especially with the anticipated decline in US interest rates, which is expected to trigger a new investment cycle among US corporates.

Disc – holding

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Black Box: Building infrastructure for the AI revolution

Introduction

More about Black Box

Does Management Walk the Talk?

Future of the business

Financials

Valuation

Latest News

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