eClerx Q1FY18 Concall Summary

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 Financial highlights

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  • USD Operating Revenue was at $48.8mn in Q1, growing by 1.9%(1.4% in constant currency terms) on q-o-q basis
  • INR Operating Revenue for Q1 FY18 was flat at Rs.3.33bnon q-o-q basis and declined 2% on y-o-y basis
  • Average new deal sizes which saw substantial dip during FY17have now reverted to historical sizes in Q1
  • Pricing is expected to be flat in FY18 as expected price increases in few large clients are likely to get offset by decreases in others
  • Forward hedge book stood at $140mn, maintained at 2.8x Revenue, with an average strike price of Rs.71/dollar(worsened by Rs.110ps/dollar) and the company expects to convert $83mn worth operating revenue at Rs.71.4/dollar in rest of FY18 
  • PAT for the quarter stood at Rs.794mn increasing 6.6% on q-o-q basis while declining 17% on y-o-y basis. PAT margin was fairly stable compared to Q4FY17
  • Other income stood at Rs.82mn compared to loss of Rs.73mn in Q4FY17. This was mainly due to depreciation of EURvs INR resulting in revaluation gains
  • The company has spent Rs.3.8mn on CSRin Q1 and spend islikely to increase in remaining quarters resulting in G&A increase
  • Net Operating Cash Flow for Q1 stood at Rs.387mn compared to Rs.649mn in Q4FY17, due to adverse working capital movement such as debtors
  • Capital Expenditure in Q1 was Rs.85mn andthe total in FY18 is expected to be in the level of FY17
  • Current taxes in Q1 were at 24% and the effective tax rate was lower than usual level at~19%. Full year effective tax rate is expected to marginally move up
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Margins

  • The Operating margin for Q1was at 27% with a 260bps drop compared to Q4FY17, 2/3rd of the drop was dueto salary hikes and rest was contributed by increase in delivery team headcount both offshore
  • SG&A was relatively flat on a q-o-q basis, while D&A decreased to 3.3% due to new FY effect and less capital expenditure in the last few quarters
  • Operating margin is expected to move closer to the benchmark 30% in H2FY18 once the effect of revenue decline and wage hikes subsides

Sub-Segmental Trends:

Financial Services

  • USD Revenue growth in Q1 was largely contributed by healthy deal wins in Financial markets vertical during FY17
  • At a service line level, Work Order Accuracy in Customer operations and Regulatory work has shown highest y-o-y growth in Q1, while Markets and Digital consulting has also grown phenomenally on y-o-y basis from a small base

Digital

  • Half of new business won during Q1 came from digital, mostly from CGI services of CLX
  • In the CGI space, the company has strengthened itscreativeproduction delivery capacity by augmenting offshore delivery teams in India and Thailand
  • At a service line level, Campaign operations and DigitalAnalyticshas shown highest y-o-y growth in Q1
  • The company currently sees fairly healthy demand across all the 3 verticals – Financial Services, Digital and Cable
  • The geographical share of Americas and currency share of USD have fairly remained stable at 68% and 84% respectively 

Business Metrics

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  •  Days of Sales Outstanding stood at 88 days, higher than usual level at the end of Q1, due to one off issues in few large clients. In the near term, it is expected to staying within the range of 75-85 days 

Employee Metrics

  • Employee Strength has increased by 3.6% to >9,000 with Sales and Business Development staff remaining steady at 78
  • India attrition increased to 41% with some of it being unavoidable due to roll offs in place and at the same time, there was a ramp up in hiring as well
  • Staff utilization stood at 76.8% and might remain lower on y-o-y basis in the next few quarters until the effect of roll off subsides

 Clients Related

  • Client counts in Rs.5mn and Rs.0.5mn have been same compared to end of FY17, while there was a netdecline of 1 in Rs.1-5mn bucket due to completion of a large legal docs remediation project for a bank
  • The revenue from emerging clients in Q1 has been stable while revenue from top-10 clients declined by 2.6% on an y-o-y constant currency basis
  • The revenue footprint on y-o-y basis was expanded with 7 out of the top-10 clients,and most notable new wins in Q1 were one of the top-3 global automotive companies and a multi-billion dollar furniture retailer in US. Some of the highlights are:
  • Started working for an existing US cable client to effectively meet newly issuedFCC guidelines of taking explicit customer approvals before making any changes to subscriber’s account
  • Started working on its largest ever Analytics engagement from an existingenterprise software product client
  • Started a large program to support an existing Canadian banking client with their AML operations

 Impact of the large client roll off

  • A large client roll offwhich was due in Q1 end hasbeen completed
  • The client used to contribute to 5% of the revenue and by losing a portion of the offerings to it, the USD Revenuemight drop 2-4%in Q2 on q-o-q basis
  • The company doesn’t see any other roll offs in the near term and once the roll off impact subsides, with a strong pipeline, the revenue growth is expected to gain momentum from Q3 

Update on Delivery Centers

  • Started live operations in North Carolina for an existing large client from Cable Vertical. The company wishes to focus more on delivery quality in FY18 and the operating margins might take a hit by 50-100bps due to operational investments. Also, as the delivery mix changes more towards onsite model, there might be a slight impact on margins in the long term as well
  • The company sees the recently opened Austin center as a hub for digital analytics activity and a permanent place for Analytics center of excellence

 Acquisition of TwoFour

  • The company has acquired certain assetsof a US based Financial markets consulting firm, TwoFour Holdings LLC and its subsidiaries
  • The transaction is expected to be closed by the end of Q2FY18, and is expected to increase the revenue by 1% for FY18
  • The Fortune 100 clients of TwoFour, which are new to eClerx, and its ability to quickly staff for clientsite consulting projects is likely to help eClerx’s Markets business to move upstream

 Update on Robotics platform

  • Robotics has seen most traction inFinancial Markets with implementation currently in progress with 5 large clients
  • The company has trained >5000 employees on its proprietary Robotics platform and haveentered into formal partnerships with 3 3rd party robotics platforms
  • It now has >300SME level certified implementers across all platform
  • Also, a dedicated team is developing use cases on Supervised and Unsupervised learning with a focuson NLP and Image Matching algorithms. Several tools of the company are expected to haveembedded cognitive automation componentssoon 

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