Ramco Systems Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Challenging year, better exit: FY23 began with the lowest bookings in years, but order intake recovered to near pre-pandemic levels, lifting the starting base for FY24.
• Deal sizes hit a seven-year high: Average deal size reached \$1.26 million, driven by five deals over \$5 million and nineteen over \$1 million.
• Cloud and recurring revenue are now structural: Cloud-based revenue rose to 58% from 49%, and the HRP business has fully transitioned to a recurring model, reducing upfront license dependence.
• Profitability is the FY24 promise, with a caveat: Management targets operational EBITDA profitability in FY24, but that goal excludes \$2 million per quarter in ongoing bad-debt provisions.
• What to watch next quarter: Whether the Americas order intake rebounds from its sharp Q4 drop, and if cost-rationalization actions deliver the promised full impact in Q2.

Revenue Model Shift

• Recurring transition is largely complete: The HRP business has entirely moved to a recurring revenue model over the last couple of years, and aviation deals now use annuity-based licenses where customers pay roughly 20% at each anniversary instead of a large upfront license fee.
• License revenue has structurally declined: Lower license revenue year-on-year reflects the deliberate shift away from upfront on-premise deals, not a demand problem; management sees license revenue at a floor, so every incremental deal win should now add to sequential revenue growth.
• Revenue recognition is smoothing out: Roughly 20% of a deal can now be recognized post go-live in five annual installments, and on-premises licenses are now rare, confined mainly to pockets in aviation and ERP.
• Risk reduction is the trade-off: By not carrying large upfront revenue, the company expects write-offs to "dramatically come down," directly addressing the root cause of the historical bad-debt accumulation.

Management: "The business model of deferred revenue what we were having, we are actually moving into more recurring revenue model. We are not carrying any upfront revenue rather we are just going as we move forward. That also will reduce a significant amount of risk in our business, thereby write off should dramatically come down."

Order Book & Deal Dynamics

• Bookings recovered to pre-pandemic levels: After starting FY23 on one of the lowest booking bases, order intake rebounded broadly across geographies, providing a much stronger launchpad for FY24.
• Average deal size hit a seven-year high: The \$1.26 million average was lifted by five deals over \$5 million and nineteen over \$1 million, concentrated in aviation and HRP after a deliberate allocation of marketing spend to those segments.
• ERP bookings were deliberately deprioritized: Around \$70 million of roughly \$90 million in bookings came from aviation and HRP, a result of consciously steering sales and marketing investment toward those two segments in FY23.
• Conversion expectations are rising: Management expects 20% to 25% of the unexecuted order book to convert to revenue in FY24, up from a traditional 15% to 20%, citing packaging improvements, delivery excellence initiatives, and automation.
• Americas intake dropped sharply in Q4: Order intake fell from nearly \$10 million last quarter to around \$1.12 million, attributed to a slowdown; management says interactions are visible and it "should start picking up."

COO: "Because of this, our average deal size has increased to \$1.26 million, which is higher than the historical average of the past seven years."

Profitability Path & Cost Actions

• Operational EBITDA is the FY24 target: Management is "fully working towards" EBITDA profitability in the coming year, though the target explicitly excludes the ongoing \$2 million per quarter in bad-debt provisions.
• Cost rationalization is underway: Actions taken in Q4 have already reduced employee costs, with the full impact expected in Q2 of FY24; overall, around \$6 million in annualized savings is targeted from salary and non-salary cost reductions, including headcount optimization and onsite cost normalization.
• Provisions have a defined, near-term endpoint: The \$2 million quarterly provision for historical bad debts is expected to continue for the first three to four quarters of FY24 and then conclude.
• Marketing investment will absorb much of the profit: Most of the profit generated is planned to be reinvested into marketing and sales, with spending calibrated to business growth from each region; manpower accounts for no more than 20% of total marketing spend.
• Growth is the other half of the equation: Management declined to give a specific top-line growth figure for FY24, but noted the starting revenue position is 16% higher than the start of FY22, and the unexecuted order book can drive 25% to 30% growth as it converts.

COO: "Me and my team are fully working towards realizing whatever we have committed to the investor community. We'll continue to strive for that and work towards next year, bringing it to the EBITDA profitability and then further growth in subsequent years."

Segment Performance

Product & Implementation

• Major product cycles are complete: The heavy development cycle for aviation and HRP is finished, leaving only ongoing enhancements; no large capital outlays are expected in these domains going forward.
• Implementation timelines are being compressed: HRP implementations currently take 6 to 7 months, with a target of 2 to 3 months within six months' time; smaller aviation deals take 6 to 9 months, targeted at 3 to 4 months; larger transformation deals run 9 to 12 months or more.
• Payroll platform coverage is expanding: Ramco has built 60 countries on its own platform, acquired capability for over 100 countries through an ICP partnership, and is building gross-to-net capability for another 40 countries, enabling support for over 105 countries.
• SASSY investment targets faster deployments: New investment in a system-assisted project implementation tool aims to accelerate go-lives, complementing the push for shorter implementation cycles.

Guidance & Commitments

Key Metrics