Ramco Systems Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Bookings momentum returns after eight quarters: Broad-based order wins across Payroll, Aviation, and ERP signal a demand recovery, though the shift to annuity revenue means the conversion to reported revenue will be gradual, not immediate.
• Revenue model transition is compressing near-term growth: The deliberate move from upfront license recognition to subscription and term licenses spreads revenue over five years, pushing recurring revenue past 50% but suppressing the immediate bookings-to-revenue conversion ratio.
• Balance sheet reset via ₹130 Cr fundraise: The preferential issue repays debt and funds product and sales investment, directly addressing a concern that a weak balance sheet was costing the company strategic orders from large customers.
• Path to profitability is now sequenced: Management targets operational cash neutrality first, then P&L profitability, aided by write-offs tapering by next Q3, cost automation, and a growing annuity base that provides better cost coverage.
• What to watch next quarter: Whether Q4 order booking holds at Q3’s level, the pace of Asia Pacific pipeline conversion as the region reopens, and any concrete timeline for ERP order uptick.

Demand & Order Book Recovery

• Order wins are broad-based: The quarter saw strong traction across Global Payroll within HRP, MRO for Aviation and Defense, and the core ERP suite, marking an uptick after eight quarters of volatility.
• Asia Pacific leads the rebound: The historically dominant market delivered $15 million of the quarter’s $27.56 million revenue, bouncing back to pre-pandemic activity levels, though conversion remains slow as markets have only just reopened.
• Pipeline is building but conversion is the bottleneck: The company converts roughly 15% of its pipeline annually; management is investing in automation and rapid implementation tools to increase that velocity, but no target percentage was given.
• Macro caution persists: Some deal decisions are slowing and then bouncing back a quarter later; management says it is too early to call a meaningful one-way trend in either direction.
• Legacy revenue leak is being plugged: The company has pruned its existing portfolio and is addressing a “leaking bucket” of legacy revenue that had been a drag.

COO: “The attempt is how do we increase that percentage. It is a basic work we are doing by increasing automation, by increasing our ability to go live faster, so that the velocity of conversion goes up.”

Revenue Model Transition

• The shift from CapEx to OPEX is deliberate and structural: License revenue previously recognized upfront is now spread over five years as annuity revenue, causing the immediate conversion ratio from bookings to revenue to drop, a trend visible for the last three quarters.
• Recurring revenue has crossed 50%: This share should continue to increase, and while it slows immediate revenue recognition, management argues it is a better indicator of future performance and will provide a stronger cushion for cost and margin management over time.
• License revenue remains the swing factor: The bulk of the QoQ revenue increase came from a license revenue swing, the same reason for the decline in the prior quarter; this volatility is expected to continue.
• Revenue is now closer to cash: Under the new model, the company either collects license money upfront or uses term licenses and subscriptions, so revenue is recognized as earned and unbilled revenue is reducing.
• Old-model provisioning is winding down: Large write-offs from Covid-era deals where license was booked upfront but payment spread over time are being prudently evaluated and provided for; no new orders are booked in that manner.

Chairman: “Earlier the trend was to take the license, payment for which will be spread over 3-5 years. Now, we are either trying to get either license money upfront, or we are going for term license or on subscription concept, so we don’t take the full revenue upfront. So, it will be more or less as you earn, you account for the revenue. Revenue is very close to cash.”

Profitability & Cost Trajectory

• Operational cash neutrality is the first milestone: Management targets this in the immediate coming quarters, ahead of P&L profitability, which should follow in the coming few quarters as the annuity base builds and write-offs reduce.
• Write-offs have a defined end-point: The large amount of write-offs should end by next Q3, with only standard expected credit loss provisioning continuing thereafter.
• Cost optimization is multi-pronged: Concrete efforts include RPA-driven automation of managed services, testing automation across the company, reduction in subcontracting and outsourcing, and prudent cost management, all aimed at gradually bringing down losses.
• Headcount costs are expected to plateau: The company has enough manpower currently and expects to absorb new wins without adding headcount, due to investments in automation and rapid implementation; salary costs may come down for a shorter period.
• Sales and market-facing roles are the exception: Cost increases are expected only in these areas, on an affordable basis, in geographies where higher revenue is anticipated.
• Attrition is trending down: Attrition came down 6% on a trailing 12-month basis, with the trendline clearly moving downwards.

Management: “Before that immediate aspect is operationally, we have to be cash neutral. That would happen very earlier than the P&L profitability, that is what we are targeting immediately in coming quarters to be operationally cash positive, and then followed it to the P&L.”

Product & Vertical Momentum

• Aviation and HRP are “fully firing”: A deliberate focus at the beginning of the year has paid off, with these two verticals now delivering strong momentum. ERP is expected to pick up in coming years.
• Global Payroll is deepening its ecosystem: Seven more countries were certified for Workday connectors this quarter, and Darwin box is now also a partner appearing in the HRP pipeline.
• Logistics software is operational and live: The logistics module, reflected under the ERP business, has completed upgradation, gone live with many customers including in Australia, with one more Australian implementation progressing well.
• Net headcount additions are targeted: The company added headcount in the US for defense, aviation, MRO, and ERP, and in Europe for aviation and HRP.
• ERP order uptick is promised but undated: Management says it should start being seen “sooner,” but no specific quarter was committed.

Fundraise & Balance Sheet

• ₹130 Crores raised via preferential issue: The capital will repay existing loans and strengthen products and selling/marketing activities, with a portion from the promoter (PRV) having an option to subscribe the balance over the next 18 months.
• The rationale was strategic, not just financial: The Chairman stated that big customers look at a healthy balance sheet before awarding strategic orders, and the company did not want its weakened position to adversely affect order bookings.
• Debt retirement is the goal: The company aims to retire all existing debt and not need further raising for at least 2-3 years, but management declined to assert this strongly, saying it needs to see the trend for 2-3 more quarters.
• No timeline on the promoter’s balance subscription: Management deflected, saying it will be done “whenever required” within the 18-month limit.

Chairman: “I didn’t want it to adversely affect our order bookings, because these big customers do actually look at a healthy balance sheet before they give these strategic orders.”

Leadership & Disclosure

• No CEO search is underway: Management stated the current team is executing well and things are stabilizing, so no decision has been made and the company is not looking for a CEO as of now.
• COO has relocated to global headquarters: Sandesh Bilagi moved back to Chennai after a decade-long stint building the business and teams in Australia.
• Fact sheet enhancements are promised, not delivered: An analyst’s year-long request for product-wise competition data, funnel details, NPS scores, and order sizes was deferred again; management committed to adding geographical breakdown (already done) and competitive data “from the coming year.”

Management: “I think the team now is executing very well, and things are stabilizing. So, we haven’t made any decision as of now.”

Guidance & Commitments

Key Metrics