R Systems International Limited — Q2 FY25 earnings call

Call held 8 Nov 2024

Management summary

R Systems International reported a strong Q3 FY24, demonstrating sequential and year-on-year growth in revenue and significant expansion in EBITDA and net profit. The company achieved industry-leading utilization rates and improved gross margins through operational efficiencies. Strategic initiatives like a new delivery center in Mexico and the launch of OptimaAI are underway, while the market sentiment is showing signs of improvement for 2025.

Highlights

  • Revenue for Q3 FY24 stood at ₹4,441 million ($53 million), marking a 2.8% QoQ growth and 1.4% YoY growth (excluding one-time fee).

  • EBITDA reached ₹796 million ($9.5 million), with an EBITDA margin of 17.9%, showing an 11.5% QoQ growth and 19.5% YoY growth.

  • Net Profit after tax was ₹398 million ($4.8 million), a significant increase from ₹248 million ($3 million) in the previous quarter.

  • Gross margin improved to 36.3% in Q3 FY24, up from 35.5% last quarter, primarily due to improved utilization.

  • Utilization rate reached 83.5%, which management considers industry-leading.

  • DSO improved slightly to 59 days from 60 days in the last quarter.

  • Cash and bank balances (net of short-term borrowing) increased to ₹260 crores from ₹179 crores last quarter.

  • Basic EPS for the quarter was ₹3.37, up from ₹2.1 last quarter.

Key financials

  1. Revenue 4,441 Mn +1.4%YoY
  2. EBITDA 796 Mn +19.5%YoY
  3. EBITDA Margin 17.9%
  4. Net Profit 398 Mn
  5. Basic EPS ₹3.37
  6. DSO 59 days
  7. Utilization Rate 83.5%

What they filed

Q1 FY27: revenue up 30.3%, net profit down 26.3% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue444 449 442 462 499 +12%555 +24%575 +30%602 +30%
EBITDA68 71 71 70 72 +6%94 +32%104 +46%111 +59%
Net profit40 39 39 76 35 −12%36 −8%65 +67%56 −26%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

  • North America
    74.1% Revenue Contribution
  • Southeast Asia
    14.2% Revenue Contribution
  • Europe
    8.1% Revenue Contribution
  • Rest of World
    3.6% Revenue Contribution

Guidance & targets

Profitability

  • EBITDA Margin Profitability · future quarters · Medium confidence sustainable
    So, while our margins will remain sustainable, and when you look at our annualized margins, you will see a sustainable growth in them.

    — Nitesh Bansal, Managing Director and CEO

Revenue

  • Volume Growth Momentum Revenue · Q4 · High confidence definitely there
    I won't be able to give you a forecast, but volume growth momentum is definitely there.

    — Nitesh Bansal, Managing Director and CEO

Pipeline

  • Average Deal Size Pipeline · quarter-on-quarter · High confidence go up
    Anmol, we are definitely seeing our average deal size go up, quarter-on-quarter.

    — Nitesh Bansal, Managing Director and CEO

Market Sentiment

  • Market Sentiment Improvement Market Sentiment · beginning of '25 · Medium confidence improving
    we remain fairly optimistic of the market sentiment improving with the beginning of '25.

    — Nitesh Bansal, Managing Director and CEO

Risks & concerns

  • Macro environment impact on growth

    medium

    Company's growth has been impacted by the macro environment, though they are expanding margins through operational efficiencies.

    Management acknowledged

  • Seasonal impact in Q4 due to furloughs and holidays

    medium

    Q4 always has a seasonal impact, dampening revenue conversion from volume growth due to fewer working days and furloughs.

    Management acknowledged

  • Inability to increase billing rates

    medium

    The market environment does not support rate increases, and the company has not been able to get billing increases.

    Management acknowledged

  • Client concentration in telecom sector

    low

    Top client contribution came down from 5.2% to 5% largely due to curtailment of spend by a telecom customer, but signs of reversal are emerging.

    Management acknowledged

Areas of evasion (2)

  • Quantitative pipeline metrics (ACV/TCV)
  • Specific revenue growth forecast for Q4

Q&A highlights

1 direct
Pipeline growth and quantification (ACV/TCV) Partial
However, since we do not share the ACV, TCV numbers or the guidance, I won't be able to provide that. But like I said earlier, we have seen both, the number of inquiries as well as number of proposal asks go up, and we continue to work through them.

Analyst sought quantitative data on pipeline health, but management only provided qualitative assurance, indicating a lack of specific forward-looking metrics for investors.

Asked by Nikhil from Kizuna Wealth

Sustainability of margins and levers for increase Direct
And from a levers perspective, we still have levers, which will be related to as we get into larger customer sizes. The whole management overload and effort becomes more streamlined. We are looking at pyramid rationalization. And also, as we change our service mix, our service mix itself also can lead to better margins.

This question probed into the future margin trajectory given high utilization, and management outlined specific operational levers beyond utilization for continued margin sustainability and potential improvement.

Asked by Anmol Garg from DAM Capital

Impact of US interest rate cuts on discretionary spending Partial
To increase spending directly, not yet. But intend to spend, definitely. Because I think the impact of the cuts, the last cut gave people the positivity and hope that they will be able to spend more. But then there was the election, which created uncertainty, and people were obviously cautious.

The question addressed a key macro factor, and management's response indicated that while intent to spend is rising, direct spending increases haven't materialized yet due to past uncertainties like elections, suggesting a delayed impact.

Asked by Vinay Menon from Monarch Capital

2 min read 5 chapters

Detailed narrative

Strong Financial Performance Driven by Operational Efficiency

R Systems reported a robust Q3 FY24 with revenue of ₹4,441 million ($53 million), growing 2.8% QoQ and 1.4% YoY (excluding a one-time fee). EBITDA surged to ₹796 million ($9.5 million), an 11.5% QoQ and 19.5% YoY increase, resulting in a healthy 17.9% EBITDA margin. Net profit after tax significantly improved to ₹398 million ($4.8 million) from ₹248 million in the prior quarter, and Basic EPS rose to ₹3.37. The gross margin expanded to 36.3% from 35.5% last quarter, primarily due to an improved utilization rate of 83.5%.

Strategic Investments and Expanded Delivery Footprint

The company is actively building for the future, deepening customer engagements with value-added initiatives and strengthening partnerships with hyperscalers like Azure and AWS. A new delivery center has been opened in Mexico to serve North American customers with nearshore staffing and project delivery. From an offerings perspective, R Systems launched OptimaAI, a GenAI suite for enterprises, and new solutions around Power BI migration and Chaos Engineering, aiming to enhance business continuity and resilience.

Market Outlook and Pipeline Health

Management noted good signs of activity across all sectors, with increasing inquiries and proposal requests. They expressed optimism for market sentiment improving by early 2025, driven by clearer spending intent post-US elections and budgeting cycles. While specific ACV/TCV numbers were not provided, management confirmed that the pipeline is growing, and they are seeing an increase in average deal sizes quarter-on-quarter, focusing on higher-value and better-quality deals.

Geographical and Client Mix Evolution

North America remains the largest geography, contributing 74.1% of revenue, a slight 1% drop from the last quarter. Southeast Asia showed strong growth, increasing its contribution from 12.9% to 14.2%. Europe and Rest of World remained relatively stable at 8.1% and 3.6% respectively. Client concentration saw minor shifts, with the top client contributing 5% (down from 5.2%), while top 5 clients increased slightly to 14.8% and top 10 clients to 22.5%, indicating a continued focus on account management and revenue mix improvement.

Sales Organization and Partnerships

R Systems is investing in its sales bandwidth, increasing the number of people for both hunting and farming efforts. The company has brought in senior leadership, including a Chief Customer Officer and a CTO, to build deeper relationships and enhance technical capabilities. The Blackstone channel has been effective, contributing to revenue with close to 15 customers from its portfolio companies and a dozen more prospects in the pipeline. The company is also deepening partnerships with Snowflake, Databricks, Salesforce (upgraded to Crest partner), and Microsoft in the Asia Pacific region.

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