eClerx Q2FY18 Concall Summary

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Financials Highlights

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  • For this quarter, the total revenue is 48.4 million USD, declining sequentially by 0.9% in USD and 1.8% in Constant Currency (CC) terms.
  • Revenue Decline reason – Substantial decline in business from one of the top 10 US based client at the end of Q1.
  • A large portion of the impact got offset by solid growth in emerging clients of each of the 3 verticals (Digital, Cable Services and Financial Markets).
  • INR Operating revenues decreased by 1% to 3.3 billion INR
  • OPM% was at ~25.2% which is a drop of 170 bps from Q1 level due to increased cost of delivery employees both offshore and onshore. Also, a 3rd offshore location capability for Customer operations is bringing down temporary low utilization.
  • While offshore FTE business continues to enjoy above 30% OPM, it is expected thatconsolidated OPM% to stabilizeonce the impact of Q1 client decline fully subsides and redeployment of staff to other revenue generating project is done.
  • A few structural reasons for decline in OPM% over long term:
    •  Increasing mix of higher end Analytics, Tech and Consulting services as well as onshore delivery ramp up
    • Increasing focus to sell Managed services where cost curve over project life cycle has a different trajectory
    • Impact of Robotics deployment
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  • Tax rates for H1 are at 23% and Q2 is 25% and expected to be in the range of 23-25% for FY18.
  •  The PAT at 887 million INR increased by 12% sequentially.
  • Other income was 140 million INR gain in Q2 vs. a gain of 82 million INR in Q1.This wasmainly due to deprecation of various currencies at Q2 end resulting in revaluation gains.
  •  Forward hedge book of about $142 mm was at 2.8 times thequarterly revenue.
  • The average strike rate of these hedges is 70 Rs/$ which has worsened by 1Rupee to a $ since Q1 due to unfavorable movement in spot and forward premiums.
  • Based on hedges booked till now, it is expected that ~61 mm worth of inflows will convert into operatingrevenues at 70.5 Rs/ $ during H2.
  • eClerx has 7.7 billion INR of cash and cash equivalent at the end Q2 which is about 1.3 billion INR more than Q1 end.
  • H1 Net operating cash flow stood at 1.77 billion INR andhas improved by INR 109 million YoY primarily due to SEIS incentives in H1.
  • The DSO improved to 81 daysin Q2.DSO range is likely to be within 75-85 days in near term.
  • At a service line level, Content and TechServices in Digital, Digital Care Chat Services in Customer operations and Client lifecycleservices and Tech Services in Financial Markets have shown highest $ YoY growth in Q2.
  • Markets and Digital consulting practice has grown phenomenally to almost double on YoYbasis.
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  Clients related Info

  •  Due to couple of adverse events amongst top 10 clients some related to corporate restructuring on their end interms of M&A activity resulted in ultimately roll off.
  • These large roll-offs are hopefully over performance of top 10 clients should improve from here onward
  • eClerx wants to grow their emerging business faster than their top 10 clients.
  •  Growth in this quarter (i.e. 13.8 million) coming from emerging clients is pure organic and there is no significant impact of any artificial client movement across emerging versus top 10 buckets.

Employee Metrics 

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  • The Lol company employee strength has increased marginally by 0.6% during thequarter to be at 9223 due to addition of TwoFour consulting sales team.
  • Attrition has dropped to 37% in Q2 which is asignificant improvement over 41% during Q2 of last year.
  • Staff utilization based on direct production staff including trainees in Q2 saw a significant drop to 73.8%.The utilization is likely to improve from here on due to re-positioning of the freed-up resourcesto new growth in similar domain, location and shift.
  • In terms of Board constitution,Mr. VK Mundhra who was non-independent Director and non-executive chairman has vacated the office and Mr. Pradeep Kapoor, a long serving Independent Director at eClerx has been appointed as Chairman.

 Client Roll-off

  •  Management would not go too far in saying that main headwinds impacting the revenues are past behind as in this kind of business, there is a certain degree of churn built in to the revenue portfolio anyway becausecertain projects are short term or defined term projects and client strategic priorities change.
  •  Unfortunately, in the last 1.5 years eClerx have seen much higher churn than long-term average, largely due to two or three very specific client events. So once that goes portfolio churn is expected to come back down to longer term historic levels.
  • On a net basis, there should be positive growth from H2onwards which is the current strategy.

 Absolute Profit Margin

  •  Over time business has become more complex and a lot of the business is shifting away from FTE business to Managed services. So it is more plausible to focus on absolute profitrather than giving guidance on a percentage margin.
  •  Strategic initiatives like increased onshore delivery, managed services, robotics etc. will come at much lower percentage margin.
  •  eClerx doesn't want to define a target percentage margin as of now because they want these strategic growth drivers to set them up for long-term.
  • Some of the margin drop happened because of increasing the share of above mentioned services which have lower percentage margin but in the future, they have potential to grow faster than others which will result in more absolute operating profits but with lower margin.

 CAPEX

  •  Booked CAPEX of around 65 million INR in Q2
  • CSR expenditure for H1 is 28 million INR
  • There is an addition of a new theme in CSR. eClerxhave now engaged a leading NGO for skills development to improve employability ofyouth in India thereby supporting Skills and Digital India mission of the Government.

SEIS

  • eClerx has recognized exports related incentives under “Service Exports from India Scheme” or SEIS.This is a one-time recognition of INR 202 million of Other Operating revenue under Exceptional item.
  • This 202 million is further broken up into about 121 million INR of actual realized cash benefits for FY16 exports and a furtherrecognition of ~82 million INR for FY17 services on estimated accrual basis.
  • Any Operating revenue or Operating margin metrics in the earnings presentationexclude the Impact of this INR 202 million to enable to make like comparisons.

 TwoFour acquisition

  •  Asset purchase deal forTwoFour Consulting at the end of Q2 has been completed.
  • Through this purchase, eClerx inherited more than$4 million of annualized revenue across high single digit number of clients, few of which are Top 10 banking clients.
  • It is expected that both USD revenues and OPM pool will improve in H2 compared to H1 which will set up for better FY19.

 Pipeline orders

  •  At the end of Q2 the high probability pipeline size was double that of corresponding number at Q2end of last year.
  •  About 50% of this Pipeline as at Q2 end belonged to Financial Markets.
  • The pricing for offshore FTE business has remained flat on YoYbasis.
  •  The share of managed services in the portfolio, where pricing is done basis output, has increased by more than 300 bps YoY in line with the company’s strategy. The share of Analytics business, which is another strategicgrowth driver, has increased by more than 500 bps YoY.
  • During Q2, eClerx expanded revenue footprint on YoY basis with 7 out of top 10 clients.
  • A few significant pieces of work that went live in Q2:
  •  1. First, eClerx has worked on largest ever onshore consulting project in KYC area for a largeUS bank that has traditionally not worked with eClerx.
  • 2. Second, eClerx has started work on Computer Generated Imagery or CGI projects for creatinglifestyle images for a USA based furniture retailer and a toys manufacturer.
  • 3. Third, eClerx has started a large program to support echosystem of more than 10 vendors for alarge US cable services provider to manage and improve their technician dispatch operations.

 Robotic Process Automation (RPA)

  •  eClerx have scanned entire Offshore revenue portfolio for applicability of RPA (Robotic Process Automation) andhave eitherdeployed, planned or proposed to deploy Robots in suitable process elements with high ROI.
  •  Vast majority of our offshore portfolio is not suitable for application of Robotics or advance automation, which is due to the fact of having largeportfolio of smaller processes.
  •  eClerx have more than 150 bots in production today, vast majorityof which are on eClerx’s proprietary Robotics platform which will provide differentiation over competition using 3rd party RPA platforms.

 Restructuring of Support Services:

  •  Tech Services and R&D have been broken out of erstwhile Support Services:
  •  1. R&D denotes the product development and innovation effort being put inadvance automation products, platforms, Robotics, machine learning.
  • 2. Tech Servicesdenote size of rest of the software team, many of which work on client facing Tech deployments.
  • 3. The Support services now include rest of the info sec, IT infrastructure, Finance, Admin and HR teams globally.

 Business Development Strategy

  • Offshore employees headcount increased this year although there are large roll-offs by clients because there are some restrictions onrepurposing people because of the location constraints, shift constraints, the domain knowledgethat they carry.
  • So there is bound to be some mismatches as 200 heads have been grown in India since theend of FY17 without commensurate growth in revenue but that will adjust.
  • Business development (BD) staff has actually remained kind of stable but onshore delivery headcount has increased from 178 to 260 now.
  • Onshore delivery people are present at client sites and because of the intimacy with clients; there are some opportunities to be picked up by these people. So, in a way there is restructuringof onshore organization.

 Orders and Margins

  •  In the current late stage pipeline, as in terms of projects that is expected toconvert to revenue in the next two to three months,about half of it is Financial market and therest all equally split between Digital and Cable.
  •  To summarize, H1 was more Financial market but still H2 is Financial market and then the others are sort of equally split.
  •  For driving growth in financial markets focus has been on 3 different levels:
  • 1. Increasing the amount of onshore presence. Buying TwoFouraugments their move more and more onshore and they call it ideation work onshore. This will be Consulting, Project managementand so they have been getting involved in the design and analysis of this automation workflow for lotof their client work.
  • 2. The second area of focus is taking the existing functions that they work on and their existing services and converting them much more into an ops-tech service offering
  • 3. the third implication is that a lot of new engagements and existingengagements are effectively converting to managed services offerings; using a combinationof onshore project management, onshore SMEs more dedicated technology embedding in their RPA, to give an all end service which makes the clients happy.
  •  Offshore business enjoys higher margin than onshore business on a percentage business.
  •  Managed services deals tend to be lower margin upfront because eClerx are making the bet that they can drive innovation and productivity gains over the like of that of that deal and therefore as the deal progresses over time, margin should improve.
  •  So, classification of onshore, offshore managed service is a biggerdriver of margin differentials than whether it is cable markets or digital.

 Delivery Specific Info

  • North Carolina operations delivery center is dedicated primarily to serve the online delivery models for a few specific cable clients.
  •  eClerx’s portfolio is little less susceptible to robotics led risk compared to other BPM players who have very large footprint of Facilities & Administration (F&A).
  •  In this kind of business, better visibility is largely for 6 months. Long-term statement can be put in terms of hope or desire or target, but there won’t be any database weight behind that.
  •  Being a small niche player, eClerx is expected to grow at industry rates. That’s the expectation over long-term.
  • Majority of conversion happens for active pipeline orders over 3 to 6 months. So, clients don’t have to give long advance intimation.

Demand Drivers

  • The main demand drivers are:
    • Relatively early adopter of new technologies like robotics and machine learning that has led to renewed interest amongst clients to have conversations.
    • Focus on building onshore capability has helped eClerx target a broader range of opportunities.
    • Becoming more productized 2-3 years ago in terms of service that has helped the sales force in the sense that they have to sell a fewer things and therefore they can be more productive in those areas.
  • There are strong demands in H2 and there is no visibility in any of the top 10 clients to undergo any large event which could cause significant impact. Hopefully, there will be conversionwithin H2 from late stage pipeline.

 Long-term impact of Automation

  •  Earlier, automation came in the grab of Excel macros and workflow tools. It started coming more recently under the nomenclature of robotics and machine learning.
  • With the increase of automation since industrial age, unemployment rate didn’t increase to 30-40%; rather people have found jobs to do with spare capacity and it is hoped that in the future also, due to human ingenuity the same thing will happen.
  •  Incorporation of automation won’t hurt eClerx as they don’t have large pools of people doing repetitive activities; rather they have small teams doing more judgment-oriented work which is hard to automate.

 Digital Transition Impact

  •  Management believes that as large part of their business is digital business, they would be moderately beneficial with the transformation.
  • Digital business is a very scalable technology; the effect is that if the company gets more opportunities, it would be less effort intensive and less headcount is required.
  • But more manual intervention is required for working in legacy systems which are not as efficient as new cloud-based platforms.
  • On the whole, digital push is moderately beneficial for eClerx.
  • eClerx as a business in seen by their customers as middleware, the guys who take complexfunctions and transition them to a point at which they will either become sunset as when theyland or they'll get automated.
  • In the middle space, there has been a lot of uptick of demand because the skill set needed to operate in this middle space is effectively being a person who has high domain expertise and who can take much fractured processes to make to it defined, understood and low cost.
  • This is the reason why eClerx have been investing in onshore, advanced technologies because it sort of just upgrades our skill set to continue to win that business.
  • The customer understands that in this new world they need a partner sort of that's more nimble and quicker to respond and so demand uptick is seen.

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