Ramco Systems Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Turnaround taking hold, but order book dipped: Recurring revenue grew to \$9.8 mn, the sixth straight quarter of increase, while annualized cost savings hit \$5.6 mn. Order booking fell to \$7 mn as tighter deal qualification and repricing slowed signings.
• Deal discipline reset the pipeline: Management disqualified deals that did not fit product, geography or value criteria, and repriced existing deals upward. The process moderated wins this quarter but is intended to lift contract quality.
• Product stack rebuilt for platform play: A new AI-powered, serverless payroll and HR platform launches imminently, and partnerships with Deloitte and BDO give Ramco a global distribution channel it lacked as a standalone product vendor.
• Losses narrowing, but one claim lingers: Net losses continued to shrink; a provision for a terminated aviation contract is still under negotiation, with settlement expected this quarter.
• What to watch next quarter: Whether the repriced pipeline converts into orders, the aviation claim closes without further cost, and the new platform and partnerships begin generating pipeline.

Deal Discipline & Order Book

• Tightened review process: Management instituted a deal review that requires 90% product fitment and restricts certain business lines, such as logistics, to specific geographies like Australia and New Zealand. Many deals were disqualified based on size, product segment or market.
• Upward repricing: The review found customers were paying less than the value delivered. Ramco repriced some deals upward, not downward, and those repriced deals have gone into further rounds of discussion. No strong pushback has surfaced so far.
• Customer attrition risk contained: Management expects a very low single-digit percentage of customers may exit due to repricing, but revenue from such customers is not material. No significant attrition has been seen yet.
• Order booking moderation: Quarterly order booking of \$7 mn was attributed to deal decisions moving to the subsequent quarter, the disqualification of deals that did not meet new criteria, and the repricing process itself.
• Macro delays compound the drag: Many customers delayed procurement to the next quarter or next financial year. Aviation, a slow-moving industry, saw deals slip from one quarter to another, and rising interest rates caused customers to defer new orders.

Management: "We were really scared initially, but things are okay."

Recurring Revenue & Business Model Shift

• Recurring revenue milestone: Recurring revenue reached \$9.8 mn, up from \$8.72 mn a year ago, a movement of more than \$1 mn and the sixth consecutive quarter of consistent growth.
• SaaS shift underway: The company has shifted roughly 50% to 60% from license to a SaaS model. A more platform-based model and partnerships are fueling recurring revenue growth.
• Implementation model change: Ramco is moving away from fixed-rate implementation bids, which caused problems when requirements changed or customers delayed, toward models that better reflect costs.
• Growth ambition: Management wants to improve from the current 12.5% recurring revenue growth rate and hopes to accelerate it. Growth is expected to be led by platforms and subscriptions.

Management: "If nobody wants to really take one ERP and move it to another vendor or move from one payroll system to another payroll system. They don't want to do it for a minor delta in terms of the pay."

Product & Platform Modernization

• Flagship HR and payroll rebuilt: The solution has been rebuilt from the ground up on a new technology stack that is AI-powered and features a serverless, distributed, in-memory architecture. Launch is scheduled within days of the call.
• New payroll engine: A new payroll engine is being launched alongside the modernized platform, on the same timeline.
• Engine MRO under development: A specialized engine MRO solution is being implemented and will be completed soon. Management declined to quantify future revenue or profitability from MRO, stating it is not yet in forecasts.
• Product priorities set: HR and payroll is the top priority, aviation is second, and ERP is third. The company is focusing on areas with established presence, subject matter expertise, and quick implementation capability.

Partnerships & Go-to-Market

• Deloitte and BDO signed: Strategic partnerships were secured with Deloitte India and BDO, both global organizations in the top 5. The partners evaluated Ramco's solution and found it partner-friendly, providing global reach Ramco lacked.
• Platform play enables partners: The shift from on-premise product to a cloud-based platform allows partners to make Ramco's solution part of their own services for end customers.
• Inception stage: The partnerships are at the inception stage; some customer discussions have already started through them. Management declined to provide internal projections or ballpark numbers on scope or terms.

Costs, Profitability & Provisions

• Cost reduction delivered: Cost reduction programs implemented since the beginning of the financial year yielded approximately \$5.6 mn of savings on an annualized basis, contributing to improved financial health and operational efficiency.
• Net losses shrinking: EBITDA and net loss numbers show a steady decrease in net losses; the company is moving toward profitability.
• Aviation claim provision: A provision was made this quarter and last quarter for a claim from an aviation customer whose contract was terminated. The invoice was raised and money received; the quantum of refund is under discussion. Negotiations could not be completed last quarter due to the customer's internal changes and holiday disruptions. Management estimates the matter will be completed this quarter with no further major cost.
• ESOP cost trajectory: ESOP charge is loaded upfront over a 3-year vesting period, heaviest in the first year, with reversals on employee exits. The net ESOP cost will not rise sequentially unless fresh grants are issued on a large scale, and no large-scale grants are planned.
• Profitability timeline: Management would like to get into profitability "pretty soon," depending on the nature of deals and optimization turnaround efforts.

Demand Environment

• Activity stable, decisions delayed: Demand and activity levels, including inquiries, are stable or have increased, but decision-making is being delayed across geographies. Customers are cautious.
• Order booking recovery expected in quarters, not years: Management expects the delays in order booking to last for a few quarters, not a few years, stating the market has a knack of bouncing back. No specific quarter or quantitative target was given.
• Sales and marketing push planned: Management will redouble sales and marketing to help overall order booking.

Management: "It's only the question of decisions which we saw a bit delay in this cycle."

Guidance & Commitments

Key Metrics