Black Box Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Flat revenue, deliberate cleanup: Revenue was flat YoY and QoQ as the company exited low-yield customers and absorbed site delays, while EBITDA margin jumped 320 bps YoY to 6.4% in Q2.
• Order book and deal wins surged: North America backlog reached \$233 million, up from \$100 million two years ago, and Q2 deal wins exceeded \$80 million versus ~\$30 million a year earlier.
• Profitability flipped from loss to gain: H1 FY24 PAT swung to INR 56 crores from a INR 7 crore loss in H1 FY23, driven by cost rationalization and productivity.
• Restructuring costs are still running: A ~INR 10 crore severance charge hit this quarter from ERP consolidation and shared-services migration, with more to come over the next two to three quarters.
• What to watch next quarter: Whether the flat revenue trajectory actually changes as promised, the pace of low-yield customer exits, and any sign that site delays are resolving rather than persisting.

Revenue & Demand Environment

• Flat top line, two drags: Revenue was flat versus both Q1 FY24 and Q2 FY23. Management attributed this to delays at customer sites, where ecosystem partner dependencies and site readiness slowed work, and to the start of a program to exit low-revenue customers who lack growth potential and were a drag on margins.
• Site delays not seen as permanent: Management does not expect customer site delays to be a long-term or frequent occurrence, though it offered no timeline for resolution and is taking measures to burn the strong backlog to deliver required revenue.
• Product business reset: The product business faced a point-in-time difficulty; measures have been taken to introduce newer products and align go-to-market, with a return to growth momentum expected.
• Revenue trajectory shift promised: Management expects to change the flat revenue trajectory in coming quarters across both services and product business, though no quantification was provided.

Deal Wins & Order Book

• Backlog built steadily: North America order backlog rose from \$100 million in September 2021 to \$233 million in September 2023, a more-than-doubling over two years despite what management called a difficult economic environment.
• Deal wins nearly tripled YoY: Q2 FY24 deal wins exceeded \$80 million, compared with roughly \$30 million in Q2 FY23. Traction came from in-building 5G/OnGo solutions, digital workplace AVoD, enterprise networking, connected building, and data center.
• Data center positioned for hyperscale growth: Management expects significant growth in the data center market driven by hyperscale and cloud providers, and noted the company already serves three of the five major hyperscalers.
• Cybersecurity gaining attach: The cybersecurity practice, incubated roughly 18 months ago, added more than 15 customers this quarter including a Fortune client. While still a small part of overall revenue, management described it as very sticky and noted that many integrated connectivity and network deals now attach cybersecurity. Volume is expected to grow significantly in the coming year.

Margins & Profitability

• EBITDA margin expanded sharply: EBITDA margin reached 6.4% in Q2 FY24, up 320 bps YoY, and 6.1% for H1 FY24, up 260 bps YoY. Management credited the cost rationalization program and improved productivity yields.
• PAT turned positive: Profit after tax swung from a loss of INR 7 crores in H1 FY23 to a profit of INR 56 crores in H1 FY24, reflecting the strong focus on profitability over the last several quarters.
• Severance costs still flowing: A severance charge of roughly INR 10 crores hit this quarter from restructuring, winding down legacy ERP systems (now down to two or three, working toward a single platform), and moving work to a shared services center in Bangalore. Management expects severance to continue for at least the next two to three quarters, with some portion possibly continuing as part of the operational excellence program.
• Customer rationalization to help margins: Exiting low-revenue, low-potential customers is expected to have a mild positive impact on gross margins and profitability going forward, not a large drag on revenues. The company is currently assessing customers over a three-year period, evaluating yields and cost-to-serve, with measures to either increase prices or exit customers with low potential.
• Medium-term margin ambition: Management intends to improve operating margins over the next several quarters toward 8%, 9%, and 10% goals, and expects to exit upward of 9% closer to 10% over the next three years.

Verma: "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."

Capital Allocation & M&A

• Acquisition discipline reaffirmed: Management remains committed to an "acquire and scale" methodology but stressed it will pursue acquisitions only if they are economically accretive with short-term synergies and a quick turnaround. Appropriate use of cash is extremely important.
• No debt stress tolerated: The company will not overload debt or stress the business for acquisitions, and will continue to focus on profitable growth, driving organic growth if inorganic opportunities do not meet the economic threshold.
• CAPEX steady: Annual CAPEX is expected to remain in the range of \$2.5 million to \$3.5 million.
• Offshore capacity being built: The company needs to create some capacity availability in offshore resources in Bangalore, its low-cost geography, to address customer demand.

Verma: "We are economic and prudent buyers. So, as Deepak said, we'll continue to see whether it breaks in well into our program, so that we do not overload our debt. We do not stress our business. We want to continue to focus on profitable growth and if that makes sense, we will pursue it otherwise I think we will drive our organic growth."

Guidance & Commitments

Key Metrics