Ramco Systems Ltd Q1 FY2022 Concall Summary

Key Takeaways

• Revenue hit by SaaS shift and lockdowns: A large aviation deal moved to pure cloud, stripping out upfront license revenue, while Asia lockdowns crushed bookings in the company's biggest region.
• Bookings outlook hinges on large deals: Q1 bookings were weak, but management hopes for a \$25 Mn+ HR deal in Q2 and sees ~15 sizeable deals in the pipeline for Q3/Q4 that could push bookings above \$30 Mn per quarter.
• Partnerships with Oracle and Workday are the growth bet: Four Oracle wins and six Workday wins are already in hand, with certified connectors expected by August 2021, unlocking pipelines of \$50 Mn+ and \$20 Mn respectively.
• Profitability reset, not a blip: EBITDA collapsed from 30% to 10% QoQ on higher employee costs, consulting fees, and bad debt provisions; management says PAT margins are unlikely to be maintained and a steady state is at least a year away.
• What to watch next quarter: Whether the hoped-for \$25 Mn+ HR deal closes, whether Oracle and Workday connectors ship on time, and whether Asia lockdowns ease enough to let the pipeline convert.

Revenue & Booking Performance

• SaaS transition suppressed license revenue: A \$5 Mn+ aviation deal was signed as a pure cloud SaaS model with no upfront license component, pulling license revenue down to 16% of the mix from 24-25% historically.
• Asia lockdowns crushed bookings: Asia, the company's largest booking region, had its lowest Q1 in 3-4 years because prospects insist on in-person meetings and physical document signing, both impossible under lockdown.
• Cloud revenue hit a record: Cloud revenue reached 51% of the total, the highest ever, with HR and payroll already above 85% on cloud and new orders coming exclusively on cloud.
• HR order book is slow to convert: An unexecuted order book of \$90 Mn will translate to revenue over 4-5 years under the SaaS model, and going live is taking longer than desired, delaying revenue recognition.

Chairman: "The reason why we have money in the bank and we are not able to encash on the ATM is because we are taking much longer to go live."

Cost Structure & Margin Pressure

• Employee costs jumped on strategic hires: 10-12 people were added in Spain, more in Australia for logistics, 14-15 US nationals hired for defense work where Indian employees cannot access data, and salary increments were given to retain talent amid rising IT wages in India.
• Other expenses spiked on multiple fronts: Q4 had sales commission reversals that made it look artificially low; Q1 added \$0.7 Mn in commission payable, higher hosting and advertising costs, lower R&D capitalisation, and significant consulting charges for building European and African payroll.
• Bad debt provisioning is structural, not one-off: The company is providing \$1.6-1.7 Mn per quarter for doubtful debts on revenue already booked where collection is uncertain, and expects this to continue for at least four more quarters before reassessment.
• PAT margins will not hold: EBITDA fell from 30% in Q4 to 10% in Q1, and management confirmed that the 8.99% PAT margin is unlikely to be maintained, with a return to that level improbable unless a windfall deal materializes.

CEO: "We probably have to be treated a bit differently. We are a product company, not a pure service player. The dynamics are very different."

Partnership Strategy: Oracle & Workday

• Oracle partnership is already producing: Four wins have closed in recent quarters across the US, Malaysia, and MENA, with two clients already installed on Oracle Cloud Infrastructure and a ready connector expected to be announced jointly with Oracle by August 2021.
• Workday partnership is six wins in: Wins span MENA, ANZ, and Malaysia; certification on Workday is hoped for by August 2021, with a country-by-country rollout to follow through March 2022.
• Pipelines are material and growing: The Oracle pipeline is in the \$50 Mn+ range with 10 projected closures by Q3/Q4; the Workday pipeline sits at \$20 Mn and is expected to grow significantly once the connector is released.
• Connector readiness is gated on certification, not development: Both the Oracle and Workday connectors are built, but official certification and customer endorsement are required before announcement, and the process is elaborate.

Aviation & Defense: The New Growth Vector

• Defense is reshaping the aviation pipeline: Defense has moved from 5% of the aviation pipeline in 2018 to 29% today, driven by DCMA/DCAA compliance that allows bidding for US government contracts and partnerships with five major US defense contractors.
• eVTOL and drones are a greenfield opportunity: Management claims no other software vendor serves the eVTOL segment; two small orders closed in Q1, one in the US and one in Europe, and the company is pricing for scale up to a million drones even though customers are starting with 100.
• Aviation is now a complete ERP: The product has expanded to include manufacturing and the defense compliance module, positioning Ramco to capture a broader share of aviation IT spend.

Chairman: "Right now, nobody offering any software for the eVTOL segment. We are positioning ourselves as the only player right now in that segment."

Product Investment & ERP Revamp

• ERP product is getting a fundamental overhaul: Management admits the product's depth is strong but its look and feel is outdated; investment is going into a zero-touch concept with 90% fewer clicks, with AIML being embedded and tested in the company's own office first.
• ERP revenue will be muted to negative until March: The investment of \$2.5-3 Mn will run through March, and management is not chasing growth in ERP or logistics until the new user experience is ready.
• AIML tools are moving into production: A configuration tool is demonstrable and being used with new customers in a controlled manner; a self-explaining payslip using AI has been released for a US customer and can handle 75-80% of tasks a BPO operation would do.
• Logistics product is world-class but execution is weak: The Chairman admitted the logistics product has phenomenal appeal but the company has not been executing well, and he is cautious about what can be achieved until execution improves.

Chairman: "The product has a phenomenal appeal, it's a world beating product. It is that we have not been executing well. So I'll honestly admit that we have trouble in executing."

Guidance & Commitments

Key Metrics