Ramco Systems Ltd Q3 FY2022 Concall Summary

Key Takeaways

• Revenue fell ~$2 million QoQ to $17 million as Asian lockdowns and European decision deferrals choked order bookings, with Asia collapsing from ~$15–$16 million to ~$2 million.
• The unexecuted order book of ~$185 million is not converting to revenue growth, and management could not explain why cumulative consumption over five years has not lifted revenue beyond $90 million.
• A subscription revenue shift is underway: most orders closed this quarter carry no license component, so recurring revenue will build gradually but there is no immediate top-line spike.
• Write-offs will persist for another four to five quarters from troubled implementations and customer pullbacks, even though no new troubled customers were added.
• What to watch next quarter: whether order bookings begin to normalize as Asian markets reopen, whether the Oracle/Workday pipeline starts converting, and whether any of the large deferred deals close.

Revenue & Order Book Dynamics

• Asia lockdowns crushed bookings: Asia, historically a ~$15–$16 million order-closure market, dropped to ~$2 million. The expected bounce-back did not materialize because Omicron extended lockdowns, except late in the quarter in Australia and New Zealand.
• European decisions postponed: European markets also deferred decisions, compounding the Asia drag. Engagements have since started improving and management expects a bounce-back.
• Revenue fell ~$2 million QoQ: The order booking decline directly reduced revenue to $17 million.
• Subscription shift muted the top line: Most orders closed had subscription revenue embedded with no license components, so recurring revenue will increase over time but there was no immediate revenue spike. The company will pursue more recurring/subscription-based models going forward.
• Unexecuted order book not converting: The ~$185 million unexecuted order book spans four-to-five-year deals. Implementation takes 3–6 months for HRP and 8–12 months for aviation/ERP, then support is recurring for 4–5 years. About 30–35% is consumed in a year. The order book fell from $189 million to $185 million because order inflow was lower than the revenue flowing from it.
• Recurring and service revenue both flow from the order book: Recurring revenue of $8.5 million and service revenue of $7 million together total $15 million, even without new orders.
• Management could not explain the conversion gap: When pressed that mathematically, with a $160 million unexecuted order book five years back and 20% attributed to revenue each subsequent year, revenue should have crossed much higher, management deflected: "Maybe you can actually have a look at and our CFO can take you through that."

Management: "For us, the booking, decisions were just not made. We are not we are unable to explain it either, but the decisions were just not made, and our people were not able to go to meet customers."

Project Execution & Write-offs

• Difficult projects resolved: Previously 15%–20% of projects were troubled; internal governance has brought that to 0%–1%, which should lead to more projects going live and contributing to recurring revenue.
• No new troubled customers added: The company has gained control over past issues and is on the right track.
• Write-offs will continue for four to five quarters: They stem from troubled implementations and customers pulling back, even though the troubled-customer list is not growing.
• Implementation times cut sharply: HRP implementation times were reduced from eight–nine months to about three months on average, using Machine Learning principles to automatically configure countries, companies, or verticals. Aviation and other businesses saw 10–20% reductions.
• Resource shortages corrected: In prior years, resource shortages hurt the company and damaged NPS; this has been corrected strongly over the last few quarters, reflected in cash flows and pipeline.

Product & Vertical Updates

• Workday and Oracle partnerships growing: Certified connectors were built between both products. The combined pipeline grew 40% YoY from December 2020 to December 2021, with closures seen in Q2 and Q3.
• Digital transformation positioning: The company's digital transformation is more detailed and larger scale, involving running the company completely in real time (real-time P&L, cash flow, equipment monitoring), not just mobile/chatbot peripherals.

Chairman: "Because the kind of products we are doing, is basically large transformation products and very, very critical products and there are not too many companies in the world doing that. The point is how do we scale this rather than doing it in a very small level, how do we scale this."

Balance Sheet & Cash Flow

• Borrowings near zero: Peak borrowing of ₹96 crores in Q4 FY20 was brought to zero by Q4 FY21 and remained near zero, except for a modest ₹9.8 crores this quarter. Despite the revenue drop, borrowings did not rise proportionally.
• Borrowing retirement expected this quarter: The ₹9.8 crores should be retired from an operational perspective; no big spike in borrowing is expected except for investment activities.
• Recurring revenue bifurcation disclosed: The factsheet now includes a recurring and non-recurring revenue split.

Investments & Front-End Buildout

• Front-end investments started: The company began investing in front-field sales and marketing people in Germany, Spain, Japan, and the US during the quarter.
• Investment will continue: The company will keep investing in front-ending in geographies expected to grow, and in employee/talent building in coming quarters.
• Rebuild will take a couple of quarters: Investments will take that long to start reflecting in rebuild activity and a return to consistent growth.
• Cost increases being worked out: Restructuring and salary cost changes will have an impact due to market changes, but the exact amount is still being determined. Technology investments are not going to increase.

Competitive Positioning & Unanswered Questions

• Analyst questioned whether the company lost competitive position by not investing ahead in products during the post-COVID digital transformation tailwind. Management said products are strong and they invested ahead, but did not directly address whether market position has been lost relative to competitors.
• Management framed the issue as scaling, not positioning: They described the products as large transformation products with few global competitors, and said the challenge is scaling rather than positioning.
• Travel restrictions impact unexplained: An analyst noted the company did far better during the severest COVID restrictions six quarters back, and questioned why travel restrictions are now more damaging. Management said decisions were just not made and people could not travel, but when pressed further said, "We are not we are unable to explain it either."
• Deal deferment details not quantified: When asked for numbers on how many deals, value, and which verticals, management named verticals (Defense, HRP, ERP) and said smaller ones may be decided this quarter while larger ones may slip one or two quarters, but gave no figures.

Management: "We would not want to, but I think the level of losses can come down, that is what we are aiming for. We have to see how it goes because again the kind of orders we get are very lumpy. If in one quarter, I get a big order, then everything you know is taken care of. Two three big orders have been postponed also. It is very difficult to predict. We cannot commit this way or that way. That is the problem."

Guidance & Commitments

Key Metrics