Ramco Systems Ltd Q2 FY2024 Concall Summary

Key Takeaways

• A balance-sheet reset quarter: A one-time non-cash provision of \$15.10 million was taken to clean up aged receivables and unbilled revenue, a move management says retires "the ghosts of the past" and ends the ongoing provisioning exercise.
• Recurring revenue shows momentum: Recurring revenue reached \$9.49 million, up 14%+ YoY, marking the fifth consecutive quarter of consistent growth, with around 50% of revenue now from cloud/SaaS customers.
• Orderbook surged in Asia, slowed overall: Asia orderbook jumped 86% YoY to \$10.81 million, but total deal win momentum slowed as longer-cycle aviation deals slipped and geopolitical uncertainty extended client decision-making.
• Turnaround is a 4-to-6-quarter project: Management asked for patience through a process that will be "painful" and "interesting," with a focus on profitable growth and reaching free cash flow positive at the earliest.
• What to watch next quarter: The outcome of the canceled aviation deal claim, whether slipped deals close in Q3/Q4 as expected, and any stabilization in the provisioning run rate now that the one-time cleanup is complete.

The One-Time Write-Off & Balance-Sheet Reset

• \$15.10 million provision taken: A comprehensive reassessment of the business led to a one-time non-cash provision against trade receivables and unbilled revenue, cleaning up the balance sheet in a single quarter rather than dragging the exercise out.
• Pre-COVID orders drove the write-off: Many orders written off were signed before COVID; post-pandemic, customers changed strategies, de-scoped countries or product lines, or no longer wanted to proceed. Provisioning was also based on aging, with accounts receivable more than three years old.
• COVID implementation friction contributed: Industry implementation is high-touch, requiring presence at customer sites, shop floors, finance departments and hangars. This could not be done effectively during COVID when most work moved virtual.
• Management insists no market share was lost: When asked directly whether the write-off signaled product or market-share problems, the CEO answered "Absolutely not," pointing to pipeline and the unexecuted order book as evidence. Customer visits across Australia, New Zealand, US, Philippines and the Middle East yielded "overwhelming interest in the product."
• Future provisioning risk called low: Management stated that further provisions will be less than 2% and that all one-time provisioning and write-offs have been taken in the last quarter.

CEO: "The ghosts of the past have really been retired. Let me put it that way."

Revenue Momentum & Vertical Health

• Recurring revenue as the growth engine: Subscription revenues picked up, driving recurring revenue from \$9.23 million to \$9.49 million QoQ, a 14%+ YoY gain and the fifth straight quarter of consistent growth.
• HRP is the star performer: The HRP pipeline grew 46%+ QoQ and 101%+ YoY, and HRP was the major contributor to overall order booking at \$10.62 million. New senior leaders have improved the company's ability to articulate its proposition to prospects.
• Asia orderbook surged 86% YoY: Asia showed remarkable post-COVID recovery, with orderbook rising from \$5.81 million in Q2 FY23 to \$10.81 million in Q2 FY24. The pipeline shows an additional 83% year-over-year growth, mainly from Singapore, Malaysia and Indonesia.
• Europe grew on partnerships: Europe displayed notable year-on-year growth, largely attributed to partnerships and alliances.
• Aviation demand is strong but decisions are slow: US aviation customers are having "one of their best years" and are not under financial stress, but decisions go through multiple levels of scrutiny. The company operates in helicopter, defense and MRO segments, not civil aviation in a significant way.
• Deal win momentum slowed on mix and geopolitics: HRP deals move quickly while aviation deals take much longer. Some expected deals moved from Q2 to Q3/Q4. The company is not seeing market slowness, but the geopolitical situation is causing companies to take longer to make decisions.

WTD: "Aviation and the market are doing extremely well. Go to the airports, airports are full, the flights are full, the ticket costs are high, so aviation as a market in general, I think they are having one of their best years now."

The Canceled Aviation Deal

• A provision has been taken: The company booked a provision for a recently canceled aviation deal where implementation is nearly complete. The customer has raised a claim, and discussions are ongoing.
• Outcome expected in Q3 or Q4 FY24: Management stated the resolution will be known during this quarter or the next, depending on how discussions progress. The provision already factors in the anticipated financial impact.

WTD: "This we have taken a provision for that. We are in discussion with the customer. Primarily, it is a claim from the customer. We are having ongoing discussions with the customer. The outcome of it, we will know during this quarter or the next quarter, depending on how it goes."

Strategic Focus & Operational Changes

• Doubling down on strengths: The company will focus on a subset of solutions and a subset of markets where it is strong, prioritizing product lines that have shown strong product-market fit.
• Logistics strategy narrowed: Management decided to defocus on certain logistics solutions like container management and will not focus on the US for logistics, instead doubling down on Australia and New Zealand.
• Implementation cycle reduction underway: Work is in progress to parallelize processes and enhance the product to reduce implementation cycles and create more self-service for customers. Details are not yet ready for disclosure.
• Operational measures to prevent future bad debts: The company is cutting down areas where the solution was not strong or where the sales dollar was not right to penetrate the market.
• Growth will not be sacrificed: Management was explicit that it needs both growth and profits, and deal qualification now starts from a profitable-growth lens.

CEO: "We are the only organization in the world who have the payroll rules and regulations of close to around 65 countries in a single code base."

Deals, Pipeline & Competitive Position

• Two million-dollar deals signed: A leading global automotive parts supplier chose Ramco to manage its payroll operations, and a leading integrated building materials company selected the Ramco ERP system.
• Unexecuted order book at \$193 million: This typically translates into revenue over the next three years, providing a good start to the next quarter.
• Everest PEAK Matrix recognition: Ramco was named a leader in payroll solutions in the world by Everest PEAK Matrix, primarily marked in APAC.
• Two defect-free implementations: In the last quarter, two defect-free implementations happened in Australia and New Zealand for logistics.
• Partnerships continue to strengthen: The company is deepening engagement with key partners and alliances.
• No order booking guidance given: When asked about reaching USD 25-30 million per quarter or USD 100 million yearly in order booking, management declined to talk about numbers, stating they are in the beginning stages of turnaround.

Guidance & Commitments

Key Metrics