Ramco Systems Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Slow quarter, structural drag: Revenue growth was slow, held back by a bookings dip in prior quarters and a structural shift to deferred/recurring revenue models that delays revenue recognition relative to order booking.
• Asia engine restarting: Asia, historically the "turbo engine" and shut during COVID, posted its highest order booking in four quarters, a signal that in-person markets are reopening.
• Costs peaked, attrition halved: Headcount costs rose from COVID-era implementation demands, but attrition dropped from ~32% to ~14% and management says no further cost increases are expected.
• Profitability is not imminent: Management stated closing quarters in the black is not immediate and that a full-year profit is "too much to expect even internally."
• What to watch next quarter: Whether the \$600M pipeline converts into the promised H2 order booking improvement, and whether the deferred revenue model begins to "iron out" so revenue catches up with bookings.

Revenue & Order Book Dynamics

• Bookings dip drove slow revenue: A fall in order bookings in the last two quarters of last year and only a slight improvement in Q1 caused the current slow revenue growth.
• Q2 bookings fell sequentially: Order booking was \$17.32M, down from \$21.7M in the previous quarter, though some orders slipped and management is confident they will materialize.
• Deferred model masks bookings: A structural change to booking only recurring revenue orders means revenue is not commensurate with bookings; this impact is expected to "iron out" in the next two quarters.
• Unexecuted order book is slow-burn: The unexecuted book consists primarily of services and AMC spread over 3-5 year contracts; AMC is divided equally over time and services depend on milestone achievement, so the book cannot "gallop" into revenue quickly.
• Flat AMC reflects low license inflow: AMC and subscription revenue are flat because license revenue has not grown; license inflow is low, so corresponding AMC remains low, though no major customer has left.
• Past projects consumed resources: 10-12% of manpower was locked into critical past projects, and high attrition required holding a higher inventory of resources, adding cost pressure.

Management: "That is because the unexecuted book consists primarily of the services and the AMC. So, AMC cannot gallop, we have to divide equally, only the service competent will make a difference depending on our milestone achievement and the accrual of the revenue."

Geographic Performance

• Asia was the missing engine: Asia used to be the "turbo engine" for the business; markets were shut during COVID, severely impacting order booking because the region requires in-person meetings.

COO: "Asia used to be our turbo engine and we will start seeing better numbers coming from this region and also the other regions have stood or improved in the order booking positioning."

Cost & Manpower Trajectory

• Attrition collapsed: Attrition dropped from ~32% annualized last year to 6% in Q2, cumulatively ~14% for H1; management expects it to taper to ~24% annually, the pre-COVID level.
• Costs have peaked: Extraordinary measures including salary increments, retention payments, and bonuses have all been completed; management stated no further cost increase is expected and manpower costs should start dropping through natural attrition.
• Headcount rose from COVID demands: COVID effects forced improvement in implementation, requiring more people; headcount increased and costs went up, but this is now coming under control.
• Lower attrition eases cost pressure: The drop in attrition should translate into better cost management from a people perspective in coming quarters.

Management: "Whatever increase - from the headcount as well as the salary increment and retention, bonuses and whatever we had to do all those extraordinary measures, we have done already and we don't expect to pump in or increase any cost further than this."

Operational Efficiency Initiatives

• DevOps and automation push: The company has aggressively adopted CI/CD, test automation, and RPA across every product line to automate engineering and implementation processes; results should start showing in coming quarters.
• Implementation timelines shrinking: Automation enhancements are expected to reduce implementation timelines, shrinking order-to-cash time, which should reflect in revenues.
• Backlog projects nearing completion: Most identified backlog projects will finish by the end of this year; barring two projects, most activities will be completed, freeing up resources.
• Current year is for consolidation: Management positioned this year as one of consolidating and delivering on orders already booked, focusing on execution and building execution capability.

Management: "We said this current year is the year of consolidating and probably delivering them whatever the orders we have booked. So as mentioned that remains our position."

Product & Segment Developments

• Aviation expanding beyond traditional segments: The company branched out from helicopter and MRO segments into eVTOL and drone segments, with wins including General Atomics and multiple others.
• HRP shifts fully to SaaS model: The HRP business has completely moved to a per-employee-per-month (PEPM) model; previously over 50% of HRP revenue came from licenses, so this structural change explains the revenue adjustment versus prior periods.
• Oracle and Workday ecosystem embedding: Most HR order closures now have linkages with either Oracle or Workday; the company participated in Workday Rising and Oracle OpenWorld events and saw good interest from implementation partners.
• Core ERP go-live focus: The company is consciously focusing on going live on customers picked up and will remain so for another two quarters; results will start reflecting after that.
• Aviation and defense pipeline: Management expects Aviation Air Force and Defense business to start showing in the next two quarters.

Management: "In the HRP business, almost everything currently what we are reflecting is recurring and it is a transaction-based price. We have moved to per employee, per month basis."

Pipeline & Demand Environment

• Large pipeline in advanced stages: The company has around \$600M in pipeline, of which more than half is in active and advanced stages, which management believes should result in better negotiation and closure.
• Sales investment building pipeline: Sales and marketing spending increased this year after being held up during COVID, resulting in pipeline build-up and advanced negotiations.
• Order booking expected to improve in H2: Management expects better order booking in the coming two quarters and is confident numbers will be better than last year's H2, which plummeted to ~\$25M.
• Scaling ambition: Management expressed confidence in scaling beyond \$25M in order booking per quarter in the next year or the next two to three years.

COO: "We have around \$600 million on the pipeline, of which more than half is in the good stages and we call that as active and advanced stages."

Guidance & Commitments

Key Metrics