eClerx Q3FY18 Concall Summary

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Financial Highlights

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  • Toal revenue in Q3FY18 is 48.9 million USD, which is the highest reported revenue in last 5 quarters.
  • PBT declined from INR 1179 mm in Q2 to INR 784 mm in Q3.
  • Three equal contributors for this decline are:
    • SEIS incentive delta of ~INR 140mn
    • Other income decline of ~134mn due to INR appreciation and
    • Reasons attributable to OPM decline explained under operating margin performance
  • PAT in Q3 has declined slightly more than PBT to INR 575mm as effective tax rate in Q3 coming at more than 28%.
  • Forward hedge book remained constant at $142 mn which was 2.9 times the quarterly revenue. The average strike rate of these hedges is 69.3 rs/$ which has further worsened by 0.7 INR to a $ since Q2 due to unfavorable movement in spot and due to continued slide in forward premiums.
  • Based on hedges booked till now, it is expected that  ~31 mm worth of inflows will convert into operating revenues at 70 rs / $ during Q4FY18.
  • eClerx had about 7.8 billion INR of cash and cash equivalent at the end. YTD Net operating cash flow stood at 2.32 billion INR and has decreased by INR 150 million YoY.
  • While lower CAPEX of around 54 million INR was booked in Q3, in Q4 it is expected to be higher depending upon ramp up plan of Fayetteville facility.
  • The DSO has remained constant at 81 days in Q3.
  • A share Buyback of Rs.258 crores at price of Rs. 2000 is announced and is now subject to regulatory approval and is expected to close by March end.
  • eClerx expect that majority of Buyback costs in Q4 will be adjusted against retained earnings and not affect G&A further.
  • eClerx have also recognized incentives under “Software Exports from India (SEIS)” scheme of Rs. 6.5 crores for 9 months of this year in quarter 3 under operating revenue and similar incentives amounting to Rs.20.4 crores for prior years were accounted as exceptional item in Q2.
  • eClerx achieved reversal of declining revenue trajectory in Q3, and is hoping that both USD revenues and OPM pool will grow sequentially from Q4, which will put them in better position for FY19.
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Operating Margin performance

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  • Operating margin is about 25% on an average over the nine months period.
  • There are two things that drive the margin performance:
    • First is the business mix. Offshore BPO work will typically be of higher margin than Onshore work or some of the Managed Services work initially.
    • Other big factor is the Exchange rate. Margin levels are also partly a function of the rupee being appreciated against the dollar over the last 2 to 3 years.
  • Utilization also needs to be improved to reduce cost of delivering sales and therefore improve margins.
  • The intention of eClerx is to grow the absolute OPM pool as opposed to focusing on the percentage margin.
  • Operating margins came down by 230 bps due to the following reasons:
    • Sharp change in business mix towards onshore, consulting, managed services and Robotics. Redeployment of excess staff resulting from client roll offs during H1 will be completed by March.
    • The project for setting up 3rd offshore site for Customer Operations will complete soon. Although some of YTD investments in Fayetteville staff will accrue revenue in Q4, but it is anticipated that investments towards future ramp up of the center will continue to precede the corresponding revenues.
    • All these business mix changes and trends have contributed to 60 bps of OPM decline.
    • There has been substantial investment in Business Development team this quarter to promote onshore consulting sales, which was the single largest reason of OPM decline in Q3FY18
    • Legal and professional fee has also impacted OPM by 70 bps because of acquisition of Twofour Consulting, recruitment fee for new senior talent and SEIS incentive related fee.

Cost

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  • Selling and distribution cost has gone up by about Rs. 5 crores as 3 new people were added to Business Development (BD) side and some BD staff from TwoFour Consulting were inherited including some very senior people.
  • There was a little increase in travel as well this quarter due to seasonality factor.
  • As eClerx is trying to build different model of Consulting and Onshore, there are a few other types of contracted resources required to support that organization, that also add to the BD cost.
  • Absolute BD cost will not see any significant increase in the near future.
  • Attrition has been elevated to 38% as there had been significant roll offs for large three clients over last 18-20-months and that created some bit of excess people which increase cost at the point of roll-off.

Strategic Initiatives

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  • eClerx have made substantial progress across 4 strategic initiatives during Q3.
  • Onshore revenues have increased by more than 50% YoY in Q3. Consulting, major portion of which is onshore has grown 2.5 times over same period. Fayetteville center has now started generating revenues at US billing rates.
  • Analytics business, after lower growth for last few quarters has grown significantly YoY in Q3.
  •  eClerx have made substantial progress in Managed Services deals with revenue from such deals increasing by 26% YoY in Q3.
  • IT or advanced automation services revenue has grown by more than 50% YoY out of which RPA revenues have doubled every quarter this year.

Pipeline Orders

  • At the end of Q3 the high probability pipeline size was 2.5 times that of Q3FY17.
  • The largest share of current pipeline is from Financial markets, closely followed by Digital and followed by Customer operations.
  • At a service line level, campaign operations in Digital and regulatory services in Financial Markets have shown highest $ YoY revenue growth in Q3.
  • Entry deal sizes for new logos have more than tripled in Q3 on YoY basis due to onshore delivery and consulting lead sales focus.
  • During Q3FY18, revenue footprint was expanded on YoY basis with 6 out of current top 10 clients.
  • eClerx added 4 new clients in Fortune 500 league this quarter with 2 in Markets and 2 in Digital.

Employee Metrics

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  • Staff utilization based on direct production staff including trainees in Q3 further dropped to 72.9% due to decline in offshore BPO revenue creating excess staff. The utilization is likely to improve to the extent of future BPO revenue growth resulting in redeployment of excess staff.
  • Attrition has marginally increased to 38% in Q3, which is likely to move to stable levels once the staff redeployment is completed.
  • eClerx tried to redeploy but some people who could not find redeployment within reasonable period of time left their jobs due to demand in other companies.
  • With the current business mix and the current volume of work offshore, staff utilization can theoretically go up to 75% from 73%.

Clients Related Info

  • The client counts in all revenue buckets have remained largely same as in Q2 but for one new entry of 0.5mn Financial Markets client and downward movement of one digital client within the buckets.
  • While the YoY growth of top 10 strategic client continue to show YoY de-growth primarily  due to the loss of a key client in H1, eClerx have been able to grow emerging target clients consistently in double digits due to existing client mining.
  • The headwinds on the top-five hopefully are largely behind eClerx because the large roll-off has now been completed.
  • eClerx is expecting the top 5 accounts to be stable and perhaps grow a little bit as they go ahead on QoQ basis.

Future Outlook

  • eClerx’s management team thinks Q3FY18 is a trough quarter and absolute OPM in terms of rupees or dollars should increase starting Q4FY18.
  • Broad revenue mix across the three segments is approximately 40:40:20 (Finance:Digital:Cable) and has not changed much.
  • In Financial Services, demand is coming from “creative asset production” and in Digital space; there is good demand from Marketing Analytics and Digital Analytics.
  • eClerx should continue to see some uptick in dollar revenue in Q4 as well as in utilization. Combing both the factors, there should be some growth in absolute OPM on QoQ basis in Q4.
  • Customers are looking for vendors who can solve business problems by using combinations of Artificial Intelligence, Robotics, Business Consulting and Offshoring.
  • Customers are not just looking to get offshore arbitrage but also looking to automate away some things and reengineer some parts of the offshore.
  • Number of these opportunities came up for the last six months which is giving eClerx the confidence to say that demand environment is better than the last year.
  • Most of the growth in future in onshore delivery is likely to come from Fayetteville center. In terms of financials, nothing is certain and disclosures need to be reviewed at the start of next year.
  • Revenue from this center will start in Q4 which will help offsetting the cost at least in Q4. So it is most likely that absolute profit of Rs. 78 crores will grow in absolute sense because of multiple factors in Q4.
  • Most of the growth is coming from mining of existing clients and the trend may continue.
  • In case of top-10 largest clients, one of the biggest downward movement factors has been theroll-off in some of those accounts. It has been happening in almost seven of the top-10 accounts.
  • Downward factors are being arrested which will help the natural growth to return in the top-10.

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