i-flex solutions limited
Q3 Earnings Call
January 30, 2003
Moderator: Good afternoon ladies and gentleman. I am Prathibha, the moderator for this
conference. Welcome to the i-flex conference call hosted by DSP Merrill Lynch. Mr. Shekar
Singh of DSP Merrill Lynch is your call leader today. For the duration of the presentation, all
participants’ lines will be in the listen-only mode. After the presentation, the question answer
session will be conducted for international participants connected to SingTel. After that, the
question answer session will be conducted for participants in India. I would like to hand over to
Mr. Shekar Singh of DSP Merrill Lynch. Thank you and over to Mr. Singh.
Shekar Singh: Thank you Prathibha. Hello ladies and gentlemen. Welcome to the i-flex Q3
earnings call hosted by DSP Merrill Lynch. I am Shekar Singh from the equity <audio not clear>
team of DSP Merrill Lynch. The i-flex team today comprises of Mr. Rajesh Hukku, Chairman
and Managing Director, Mr. R. Ravisankar, CEO International operations, Mr. Deepak Ghaisas,
CEO Indian operations and Mr. Makarand Padalkar, Head of Product Marketing. First of all I
would like to thank i-flex for giving us this opportunity to host the call. I also wish to
congratulate them for achieving commendable results in difficult circumstances. Without further
ado, I would like to hand over the floor to Mr. Deepak Ghaisas to start the proceedings. Over to
you Mr. Deepak.
Deepak Ghaisas: Thanks Shekar. Good morning and good afternoon to everybody. Before
Rajesh starts his address, let me draw your attention to the fact that in this call, we might make
certain forward-looking statements within the meaning of the Private Securities Legislation
Reforms Act 1995. These statements are based on management’s current expectations and are
associated with the uncertainty and risk, which could cause the actual results to differ materially
from those expected. These uncertainties and risk factors have been explained in detail in our
filings with various authorities and i-flex really would not undertake any obligation to update
The forward-looking statements reflect events or circumstances after the date of various filings
that we have done. So, this way, so this was my introductory remark and then now I would like
Rajesh to start the conference call by his address. Rajesh.
Rajesh Hukku: Thanks Deepak. Good afternoon ladies and gentlemen. I along with my
colleagues take this opportunity to welcome you all in this call and thank you for your time.
Today, I am joining the call from Singapore, Deepak and Mak are in India and Shanx, Mr.
Ravisankar is taking the call from the US, perhaps true reflection of our global scale of
At the outset I want to place on record, our appreciation to the investor community for its support
to i-flex. i-flex as you are aware was voted the best newly listed Indian company by Asiamoney
in its 2002 poll, which is conducted by them among the fund managers, chief investment officers,
and heads of research at fund management firms in Asia Pacific. We were also ranked among the
top 250 fastest growing and most dynamic technology companies in Asia in the “Deloitte &
Touché Tohmatsu Asia Pacific Technology Fast 500 Report”, which is a global program that
recognizes such companies. The Indian business press is also acknowledging and appreciating
our business model. Recently, we were ranked among the top five “Most Respected IT
Companies in India”. Similarly, another business publication featured i-flex in the “Top 20
companies from India that have succeeded globally or have the potential to do so”.
Coming to our result that we have announced today. The last several months, we have been
seeing that our industry is facing exceptional challenges. However, even in this scenario, we are
extremely delighted that, this quarter too, like last quarter, i-flex group has shown exceptionally
good results. This quarter, we have grown 50% year-on-year on the top line to Rs.174 crores and
116% year-on-year on the net income to Rs.59 crores for the quarter ended December 31st on the
consolidated US GAAP for the whole group.
Overall for the group, we have acquired 15 new customers, 11 of which, are from the advanced
markets US, Europe, and Japan, taking the overall tally of customer serviced by i-flex to 391
financial institutions across 89 countries, and as you might have noticed, we have also added
three new countries this quarter. FLEXCUBE, our flagship product - the suite of products that we
brand under the FLEXCUBE umbrella continues its winning momentum and we have added
seven new customers for FLEXCUBE making the overall tally of FLEXCUBE customers to 130
financial institutions in about five years’ time since we launched it.
Our product business continued to be the driver of the growth and accounts for 65% of the
company’s top line revenues in this quarter, which is the same as the last quarter.
Our services business both with Citibank and with non-Citi customers is stable. We have added
three new relationships within Citi. However, our non-Citi business has increased at a faster rate
and has accounted for 32% of the services revenues, which is a 5% increase over the last quarter.
We have continued our efforts in strengthening processes and follow ups in the area of receivable
management. The DSO at the end of December stands at 96 days, which has reduced from 106
days as of September 30th and as you may remember, from 158 days in March 2002. Clearly this
discipline, which we had promised to the investors at the IPO time, is paying off.
Overall, as we are all aware these are very unique, challenging, and uncertain times for the whole
world and depending on the circumstances that you know, are beyond anybody’s control, in the
coming quarters, all of us have to be very cautious. We at i-flex are continuously getting ready
and continuously investing in building our thrust in the market place, the new countries, the focus
countries, where we are rapidly building our marketing and branding. We are investing into
building, infrastructure and the human capability and training for the future, but at the same time
we are focusing in further improving our own operational discipline within the company, an
example of which was the DSO. At the overall level, this is what I wanted to start with. Deepak
will now take you through the details of the numbers for the quarter. May I request Deepak to
take over now please?
Deepak: Thanks a lot Rajesh. Good afternoon again to all of you. I said it the last time; this
time as well we are on the better side of the lump in our business model. We are happy to report
to you the excellent performance on multiple parameters. As you know that we have multiple
GAAPs that we have to address, which is the US GAAP consolidated, Indian GAAP standalone
and Indian GAAP consolidated. But, the US GAAP, I am going to address first, which most
analyst like to track the numbers by.
Our quarterly revenues stood at Rs.175 crores, which represents 50% year-on-year growth and
4% quarter-on-quarter growth. The net income for the quarter stood at Rs. 59 crores, an increase
of 116% on year-on-year basis and 3% on quarter-on-quarter basis. As you know that last quarter
we had one time effect of around Rs.14 crores in US GAAP numbers, which is the number that
should have got accounted in Q1, but got accounted in Q2, and therefore Q2 revenues were much
higher. After normalizing that effect in the second quarter, the growth would look like 13% on
QoQ basis on top line and 36% on bottom line.
The nine-month annualized EPS of I-flex’s group stood now at Rs.53.65. The product revenues
were at Rs.113 crores growing at 53% on year-on-year basis and 4% on quarter-on-quarter basis.
Again the same logic will apply on an adjusted one, which will look different. The net
profitability on the product business side was 48%. Last quarter, the same was at 51%. Please
note, however, that 51% was after the one-time impact of 14 crores into the bottom-line as well.
In this quarter, our service business registered revenue of Rs.61 crores representing 45% growth
on year-on-year basis and 3% growth on quarter-on-quarter basis. This quarter, we have made
some additional investments in creating more development centers; we are in the process of
creating those centers right now and have taken on additional staff in the service business. As a
result of this investment, the net margins have reduced to 16%. On the expense side, our thrust
has been to expand, and that is what we had promised in IPO time and in the prospectus, our sales
network to address the global opportunities. We have expanded our sales network from at present
and also our marketing efforts; and this has resulted into increase in selling and marketing by
36%, around Rs.7 crores increase on quarter-on-quarter basis. We expect this investment to
enable us tap the opportunities more effectively as we go forward. We are also <audit not clear>
we are in the process of creating our infrastructure. In Singapore, we will havea development
center, which will host around 200 developers and it is positioned as a good near shore center and
a disaster recovery site for our key customer projects and support. These investments and
capacity expansion have resulted in G&A increase marginally, an increase of around 2.4 crores
quarter-on-quarter basis, 15%. On the human resources front, we added 133 new employees, 132
of them are laterals, taking the group employees strength to 2,255 as end of December 31st. We
are creating a global resource pool and as of now, we have employees of 15 different
nationalities; and as Rajesh was saying it is truly an Indian multinational company from
Albanians to New Zealanders, that are the sort of nationalities included in our employee strength
and in our family.
As you know that, as on date we have the bank balance of around $110 million and 35% of which
remains in foreign exchange that is in Dollars and in Euros. This quarter, even though the dollar
was weakening, the kind of hedging policy that we had between two factors that we applied; one
was the forward cover that we took or kept on taking all the time in the whole quarter, and also
we applied Euro policy to get our at least Europe billing in Euro which has actually fetched us
exchange gain of around Rs. 94 lakhs, overall if you see, we have exchange loss of Rs.2.32
crores, which is I would guess is minimal as compared to what otherwise it would have caused if
this hedging policy was not kept in place. This covers my update on the numbers. I would like to
invite Shanx now to take over for the technology update.
Shanx: Thank you Deepak and a very warm welcome again to all of you on this call. I would
just like to highlight some aspects of the results, which are of particular interest. I think in this
quarter we have seen pretty good positive momentum from the developed markets, which we
classify as US, Europe, and Japan, 11 of these 15 new customers that we acquired for the
company were from these markets and of the seven FLEXCUBE customers that were acquired
during the quarter, we had four from Europe as well as one from Japan. In Europe in particular,
FLEXCUBE has broken new ground in this quarter winning customers in Bulgaria, in Kosova in
Ireland, and in Spain. This quarter, in addition to the momentum in FLEXCUBE sales, we have
seen excellent progress in the execution of FLEXCUBE implementations and the achievement of
milestones. As you know, every quarter, we also publish the product pipeline, which we measure
as contracted but as yet unbilled license fee, and as a result of the momentum on the sales front as
well as the momentum on the execution front, the net effect for this quarter is a pipeline of $29.5
million which is a marginal reduction from the figure of the end of the previous quarter which is
about $31 million. But, as compared to the beginning of the year, it was an increase from a figure
of $27 million.
As you are aware, one of the largest and most complex projects under way on the FLEXCUBE
front is the global deployment for Citibank and I am happy to share with you that it is going very
well and continues to <audio not clear> with momentum. The Asia Pacific region in Citibank
which covers 13 countries; Singapore, Malaysia, Thailand, Korea, Hong Kong, China, Taiwan,
Vietnam, Brunei, Philippines, Indonesia, Australia, and New Zealand; all of these are now
completely live on the FLEXCUBE platform for corporate banking at Citibank and this
represents the first region in Citibank geographically to complete its deployment of FLEXCUBE,
and the overall number of countries in Citibank that are live on FLEXCUBE has approached now
30 countries. The Latin American deployment in Dominican Republic and Paraguay have gone
live recently and these are significant because that is where the consumer banking operation of
Citibank is also being run on the FLEXCUBE platform.
On our new initiative that we had announced some time ago was the launch of the Revelues
division, a new brand to address business intelligence and analytical applications, I am happy to
report good and healthy progress on that front as well as you know sometime ago, we cross sold
that product to one of our existing customers, the International Monetary Fund in the US; that
deployment is going well. Our deployment of the African Banking Corporation has gone live on
Revelues and Revelues continues to get good positive attention from the industry analysts as well
as the recent sale to a leading bank in the Middle East.
Overall, the services business continues to grow and we are encouraged particularly by the
growth in the non-Citi customer segment while the absolute relationship with Citi continues to
grow with three new relationships from within the Citi world being initiated in this quarter. The
overall non-Citi revenue component has increased to 32% of total services revenues. Last
quarter, we started two new relationships with a banking major in the United States and this
relationship has now expanded to Europe. So, the momentum in the non-Citi services segment
continues to grow pretty healthily. The billing rates in the services business have stabilized.
There has been a marginal improvement of 5% in the offshore rates due to better productivity and
So, those are some of the highlights that I wanted to cover. We are now ready to take questions
and I would like to hand over this to the moderator. Thank you.
Shekar Singh: Thanks Shanx. Prathibha can you please start the question and answer session.
Moderator: Sure sir. At this moment, I would like to hand over the proceedings to Kanaka at
SingTel to conduct the Q&A for international participants. After this, we will have a question
and answer session for India participants. Thank you and over to Kanaka.
Kanaka: Yes, thank you Prathibha. We will now begin the Q&A session for participants
connected to the SingTel bridge. Please press *0 to ask a question. At this moment, there are no
further questions from participants at SingTel. I would like to hand over the proceedings back to
Moderator: Thank you very much Kanaka. We will now begin the Q&A interactive session for
India participants. Participants who wish to ask questions, please press *1 on your touchtone-
enabled telephone keypad. On pressing *1, participants will get a chance to present their
questions on a first-in-line basis. Participants are requested to restrict to two questions in the
initial round of Q&A session. To ask a question, please press *1 now. Our first question comes
from Mr. Chellappa of Franklin Templeton.
Chellappa: Congrats on the good results. Could you tell us some more details on what are the,
you know, efforts being made in the US and then what is success that you have achieved in
respect of community banks and if I am right, you are doing only services work for Citibank in
the US, is there any breakthrough in product revenue from Citi in US?
Rajesh: There is no new order that we have got from Citibank in the product space in the US.
There is of course the global deployment, but much of that is happening right now outside the US
and the new relationships that I mentioned that we have established with Citibank over the
quarter continued to be in the services space. In terms of the other product success in the United
States market, I think we have covered some of that in the past, which is the sale that we have
made to the International Monetary Fund, which is pretty prestigious because it is covering really
the global lending of the core lending platform covering the global operations of the International
Monetary Fund, that deployment is going well. The North Carolina Department State of
Treasurer, which is really a banking operation and that deployment, has also commenced. So we
are now in the process of actually getting live sites of the FLEXCUBE platform in the US, which
should position us well to get further business in the US because reference site is always an
important criteria in the decision making of new prospective customers.
Chellappa: Thank you.
Moderator: Thank you very much sir. Our next question comes from Mr. Chetan Shah of
Chetan Shah: Congratulations for posting good results. I wanted to understand one thing is you
have added seven new customers for FLEXCUBE, so the total revenues booked, I mean
supposing there is X amount of average price of the product, so, the total has been booked during
these quarter or it will be over a period of time?
Deepak: The way in which license fee gets accounted under US GAAP under SOP 97(2) is very
complex and we have to account for various things like VSOE and warranty and so on so forth,
but the short and correct answer is that it does not get accounted at one point of time. It gets
accounted over a period of time till the end of warranty and which may last between 9 months to
18 months kind of a period.
Chetan Shah: Okay and another thing was regarding this some acquisition you took of
Silverline Technology. How is that progressing and any plan on future acquisition?
Deepak: Rajesh you want to answer that?
Rajesh: Yes, as far as plan for future acquisition is concerned, I would like to reiterate that our
philosophy, where we are proactively looking at companies, is to augment our product. So, we
are looking at product companies, which have complementary modules and complementary
functionality to FLEXCUBE. We are not anywhere close to closing for bringing to notice of
shareholders or any such thing, but we are looking at various companies. As far as Silverline was
concerned, it was not really an acquisition in the correct sense. It was really a business as usual
because one of our big customers which is Citibank was really not being able to be serviced by
Silverline and then they had requested both of us to help them and some of their employees, you
know, who are not being paid, we took over those employees. Citibank had cancelled the
contract with them and we signed a new contract with Citi, but it did take in place the transfer,
you know, us hiring some of their employees and there is another customer which is a non-Citi
customer in US which did the same the thing, but you know that customer has not allowed us to
get out their names. So, we have not given the name, but it is business as usual. It is not like, you
know, you go and acquire a company. Different customers were really wanted to make sure the
continuity of their service improve. So, that will add some revenue to us, and that would add, you
know, these people are our employees now and that is it. We have completed the transaction. It
was not a very complex transaction.
Chetan Shah: Okay sir. Thank you.
Moderator: Thank you very much sir. Next, we have Mr. Ananth Narayan from Morgan
Ananth Narayan: Thank you and good afternoon everyone. My first question was on the
Citibank roll out. Can you update us on how much revenue has been billed so far and what is the
proposed roll out over the next four quarters?
Deepak: On the revenue side as you know, the kind of contract that we have got now, is that the
license fee gets accrued on a subscription model basis, which is on every quarter there is a fixed
amount of money that gets accrued around, on three quarters we have accrued right from April to
June, June to September, and September to December. So, that is the kind of contract that we
have got on license fee so far is concerned and it is around $1.6 million per quarter. Over and
above that as and when the roll out happens for each country, there are implementation fees and
there is interface building, which is the customization fees. That gets accrued as we roll the
country in and so far, as Shanx has said, we have rolled out 30 countries. Shanx, would you like
to add something more.
Shanx: No, as I said, we don’t normally share you know the revenue attached to individual
customers. My idea in giving the update on the roll out was really to say that the deployment is
going well and therefore the project has good momentum and, as you said Deepak, the way the
license fee is billed with the Citibank contract is that, it has now smoothened out over the quarter
that is not directly related to the progress of the deployment, but it is the time-based amortization
of the total license fee. The implementation and any other services that we do, attached to the
product, are of course built based on the deployment and that varies from quarter to quarter.
Ananth Narayan: Thanks Shanx and finally in the background of Polaris’ you know unfortunate
experience in Indonesia, can you describe i-flex’s processes to reduce such risks.
Deepak: Ananth, I think we are in Indonesia for last almost 6 years or 8 years and we didn’t
have any of these kind of experiences and I don’t think we are going to be much worried about it.
But yes, this is one more sort of possible risk which is there. We do not know thethe true story of
it as yet. But, we are there in Indonesia, and we never experienced this kind of hostility from any
of our customers, however, we have the process in place like ‘Know Your Customer,’ which is
very strictly adhered to for last almost 10 years right from the beginning, that every customer of
ours we try to understand before even putting the proposal in place that what kind of customer
that we are dealing with. We have very strong contracts that we build with which are absolutely
of international standards and kind of warranties that we give, kind of commitments that we
make, go through a lot of internal process before actually the contract gets signed or any
commitment is made to the customer. So, everywhere delivery, quality, legal, or regulatory, each
one of them is involved in every proposal and approvs and then those proposals are given, so we
are not over committed. We know exactly with whom we are dealing with and, that I think,
reduces a lot of risk if at all, as you said is perceived in a particular country or with particular
Ananth Narayan: Right, thanks a lot and wish you all continuing success going forward.
Deepak: Thanks, thanks a lot.
Moderator: Thank you very much sir. Next in line, we have Mr. Apoorva from Karvy Stocks.
Apoorva: Hello. Congrats on the great results. Something connected to what Mr. Deepak just
mentioned about the products revenues, regarding the lumpiness and the way it is booked during
the lifecycle of the implementation of the products. Now apart from whatever fresh orders that
you have got, could we account for some part of the great lumpiness that we have seen in the last
two quarters to pass the projects, the projects that you had probably implemented six to nine
months ago, and where the warranty period is completed or some part of implementation is
completed, and you have booked the revenues for that, just trying to understand what is the
normal flow in this and how much is it being accounted for by new business that you have got in
the last two quarters?
Deepak: Okay, the way in which <audio not clear> otherwise, as I said there are some deferrals
that takes place whenever we book initially the license fee. I don’t want to get into all the details
because it is very complicated and if you can meet, I can explain that to you on a piece of paper,
but the way in it happens is that the contract or the license fee keeps on getting accrued and
deferred based on the kind of contract that we have got, the kind of warranty that we are given,
kind of AMC that we are built in, and how much it differs from the what is called the VSOE,
which is Vendor Specific Objective Evidence, and if you look at the deferred revenues that we
have as on December, we have around 17.8 crores of deferred revenues on the current and non-
current accounts. Those are the revenues, which actually could have accounted for, you know,
under international GAAP or under Indian GAAP, which get deferred on account of warranty,
AMC, and advances received from customers, three accounts. So, every month what happens is
that we have a opening balance of deferred revenues, we add certain things in that based on
warranties, AMCs, and advances and there is something that gets out of that account and gets
accrued as revenue based on whether the warranty is over on a particular contract or the AMC is
beginning in a particular account and based on that that revenue gets added to the accrued
revenue and then again we carry forward the balance for the next quarter. Does that explain?
Apoorva: Okay. Apart from deferred revenue, I mean, is there something which is you know
out of the books and you know then included from the past projects or does it pass through the
deferred revenue route every quarter.
Rajesh: No, I think that deferred revenue route is only for specific cases like warranty and AMC,
but the standard flow of the revenue is based on the milestones of the project. When you sign up,
I am just giving you an example contract to contract may differ defer, when you sign up a product
order, you may sign up and upon signing 15% of the license fee, the customer would pay. Then,
upon delivery of standard version, he will pay another 15% and upon receiving the customization,
he will pay. So, the minimum that we accrue is really which is the milestone, but on addition on
top of it, because of US GAAP, we may defer something. Alright? If you look at a standard
project and your main question was that the revenues that we have booked in the last two
quarters, are they entirely due to the orders we have signed or some of those revenues are coming
because the past projects have been completed, and the second answer is correct where in any
quarter the revenue that you will book will be from the past implementations, which are going on
which the milestones got completed during this quarter and therefore you have booked that
revenue and some revenue might come in from the new orders. Although when you sign a new
order, you know, under US GAAP immediately you will not accrue that revenue. Only when you
do some standard delivery, you will accrue the revenue. But you know, if once we keep giving
this accounts over you know several quarters, there is a sort of rolling effect, because something
that you did got completed and you booked this time, but something that you started may go to
the next quarter and I think over a period of time, some kind of a cycle could happen, but on any
given quarter you would have revenues from past projects, orders which you got in the previous
quarters where the projects are being implemented and completed in this quarter.
Apoorva: This timeframe would be three to six months?
Deepak: Oh, it depends, I mean Citibank roll out for example is 100 country roll out that will go
for five years, alright, and a typical bank you know, if you take a 200 branch bank in an emerging
market, that could go for one and half to two years, but you know, you could have
implementation for small single sized bank, which could be finished in three months. So, it will
exactly depend on how long it takes to implement, but during the implementation time, on a
month by month basis or on a milestone basis, we would be getting some revenue for
implementation and we will also be getting some revenues from license fee when the milestone
occurs and after the project is live and the warranty is over, then we get the annual maintenance
revenue which is accrued as 1/12th for the total annual revenue every month.
Apoorva: Okay, thanks for clearing that up and all the best.
Deepak: Okay Apoorva.
Moderator: Thank you very much sir. Our next question comes from Ms. Rebecca Rebello of
Trideep: Yeah, hi, this is Trideep calling from UBS. Congratulations on your good result. If
you could comment little bit on the IT budgets the way Citigroup looks at it for FY-03 and
especially with respect to offshore and are they looking forward to consolidate vendors? The
second question related to Citi would be, are they looking to reduce the stake in i-flex, is that a
possibility going forward in the next one year?
Rajesh: Okay I will take this question. As you probably fully know that Citigroup is a venture
capitalist in our company, they do not discuss any of their internal plans or budgets with us. We
are like any other vendor to them. We compete for any projects that they offer or any project that
we do and sometimes we win and sometimes we lose. So, first of all let me clarify that we are in
no way associated or linked with Citibank’s internal policies. As far as their budget and
consolidation plans as are open in the market, the only thing that we know is that, you know,
about three-four quarters ago, they had looked at the vendors that are doing business for them and
like every other large corporation, they had tried to focus on a few vendors in different categories
and they had basically pushed for lot of rate cuts which happened to, you know, all the Indian
companies as well as all the big American companies that were working for them and as part of
that exercise, they did say that, you know, they are sort of reducing the number of vendors. So,
there are among the kinds of company in i-flex there are probably four or five vendors that sort of
get, you know, they are the preferred vendors for them and the bids will come out to them. Now,
in terms of whether they want to roll out more work to India, how much is their budget, what they
want to do, that is strictly internal confidential information of Citi and I don’t think any of these
vendors including us would have any idea on that. Now we have seen that in the last three/four
quarters, the revenue flow that is coming to us, you know, is pretty stable and steady and has not
gone down, but our efforts of increasing non-Citi revenue have therefore resulted in non-Citi
component of that services revenue going high. Your second question on reducing the stake,
again that is absolutely strictly up to Citibank and they have not discussed with us at all from time
to time as we meet with funds and funds ask us whether they can acquire some stake from Citi,
we refer them to Citi, but we are not aware of any thought that they have of reducing the stake or
otherwise. In the IPO clearly they had not reduced any share and in the past they have not sold
Trideep: Okay. Thanks a lot.
Moderator: Thank you very much sir. Next we have Mr. Nikunj Doshi from Kotak Securities.
Nikunj Doshi: Yeah, good afternoon to all. I just wanted to know for analysts it is going to be
very difficult to predict licensing and implementation fee on quarter-to-quarter basis, but how is it
predictable for the management of the company, I mean, is it predictable for you to have some
guess as to what will be the implementation in licensing fees over the next quarter.
Rajesh : See, what we have always said and always maintained is that the product, licensing or
implementation would continue to remain up and down as we go into the quarter, partly because
product is a long sales cycle exercise and you know some contracts may not happen. It is not like
you have 500 people doing services and every month they get billed and they can become from
500 to 550 or 500 to 400, this is an digital event when you get the contract then you get the
contract, however, once we have the contract, then the lifecycle of the contract is in our hands and
is well in our means because the delivery knows what the schedule is and we know when for that
particular contract we are going to deliver the standard version, when we will do the
customization, when they will go through acceptance and how much of warranty, so in our
internal planning for resources and planning for expenses, revenues, cash flows, we have you
know an automated method where we predict that each quarter how much revenue may come,
however, you know some particular milestone may get delayed like UAT is not in our hand, user
acceptance in the hand of the customer, they may take two weeks longer to do the UAT and
therefore that milestone may shift to the next quarter. So, that’s one part of the lumpiness. The
other part of the lumpiness in addition to that is the US GAAP because in Indian GAAP you may
say yes the event is over, but US GAAP may say, no but defer it further more. So, I do not think
that on a quarter by quarter, you know, how much we billed and all that should be really you
know very deterministic, although over a year period, consistently we have seen that the product
revenues and profits have gone year to year, but that is the nature of the beast, it is not linear, it is
exponential, it may go up or down. What you can also look here is the momentum of how many
new deals we are signing, we talked to you about tank size, we talked to you about average deal
size on an annual basis. So, all those put together give a way good indication to the analyst, but I
agree with you, it is a far more difficult and therefore probably for the analysts it is far more
exciting model to predict, because by now on services models you guys don’t have to do
anything, you have just key in the number and you would have a probably standard spread sheet.
So, this is something interesting for you people to also to do to predict this model.
Deepak: Rajesh, I think what we have internally called as ACL model that is “Actuals
Confirmed and Likely”, and that is the way we monitor or we plan our next fifth quarter’s rolling
plan and we know exactly when we can see the milestone being completed and now we are
getting some expertise also to do something on US GAAP and what milestones we can accrue
and what revenues. Internally we are quite sure what we are doing. But as Rajesh said,
sometimes the events depend on customer and it might get deferred from one quarter to other
Nikunj Doshi: Yeah, it is definitely exciting for an analyst if it is a positive surprise. Otherwise,
it could be a nasty one for the analyst.
Deepak: Your are happy, right?
Nikunj Doshi: And just wanted to know, so do we plan to give any guidance going forward on
annual basis at least.
Rajesh: At the moment, when we you know discuss this topic at regular intervals with our
Board. At the moment the Board believes that the management should focus on building the
business, planning for the future, looking at risks and contingency, it’s whole guidance game you
know puts the whole focus then on management once giving the guidance to meet the guidance. I
have also been talking very frequently to fund managers. In fact I am in a <audio not clear> here
in Singapore today and I have met five big fund managers and I asked each one of them question
and they are actually advising me that don’t give guidance and don’t get into this game. But any
way, whether it is right or wrong, I’m sure there are deferring views of it and pros and cons. At
the moment, the Board feels that we should just do our job. Our job is to build good company, do
good results, take care of the future and not to sit and predict and you know get into this guidance
game. So far that is the thing. Now, if we change it, obviously all of you would know.
Deepak: Yeah and again Rajesh, this morning we were discussing in the Board meeting and Bill
was saying that even AT&T has decided not to give guidance.
Rajesh: Lot of companies actually who have been giving guidance because <audio not clear>,
once you are giving guidance, then half of the attention of the senior management gets into this
game, so we have to meet it and if you look in US you know everybody beats the street by 1 cent
every quarter and then when you look at the 10 Ks, they are going you know by 30 cents below
their targets and every quarter there are some exceptional one time, so I think it is sort of you
know this whole guidance thing is also you know, it is not really guidance. Now, we simply have
not yet started since we are very new in the game, just three quarters, I think we are not, so far we
are saying that we will not get guidance and we will see how the trends happen in the market and
whether it really affects anybody. I know everybody would like to know that, but I think if it
shows consistently for 8 to 10 quarters what our results are, may be that is the best guidance and
you have our last 10 years’ numbers and you have got last 8 quarters numbers, so far that is what
we have decided. But we appreciate that you know there are many companies, which give
guidance and our Board is of the opinion that we should just focus on performance and stop this
whole guidance game.
Nikunj Doshi: Okay and thank you very much.
Moderator: Thank you very much Sir. Next in line we have Mr. Nilambu Syam from Kotak
Nilambu Syam: Good afternoon and congrats on your good set of numbers. I just wanted to
check one thing with you. If you go over the past two-three quarters and you look at the number
of orders you won on the product side, have you seen any difference in the trend where the
proportion of your order wins have gone up and how have your competitors globally fared in
these sort of contracts that have been bid for?
Rajesh: See we have. Our trend has been for the last two-three years on the positive side in terms
of number of wins. Of course number of wins don’t give you the whole picture, you know some
of our competitor may have one win, but that might be a $500 million win, but the IBS is really
the most objective tally that every year happens and we have submitted our numbers to <audio
not clear> people, we are announcing the numbers, depending on you know which customer is
authorizing us to do what press release, but the trend has been positive in the last two-three years
and <audio not clear>. It is January to December that is not an April to March calendar. The IBS
league table is always January to December.
Nilambu Syam: Right, as a followup question, out of the seven product clients that you got this
quarter would it be possible to give a sense between corporate banking and retail banking or that
Rajesh: Mak, can you please answer that?
Makarand: Yeah I think the split between we are sort of seeing that the corporate banking deals
account for 60% of the thing. There are many deals where we sell retail and corporate banking
together. So, the retail business really accounts for about half of the deals in any case. It varies
between 50% to 60% of the FLEXCUBE sales.
Rajesh: See FLEXCUBE as you know is a universal banking solution perhaps the only one of its
kind, so a lot of our deals are where the bank is taking both corporate and retail, which we call as
UBS or Universal Banking Solution, so its both corporate and retail.
Nilambu Syam: Thank you.
Moderator: Thank you very much sir. Our next question comes from Mr. Amit Khurana of
Birla Sunlife Securities.
Amit Khurana: Yeah, thank you so much. My first question is, does the management foresee a
scenario of an industry consolidation where i-flex is operating in and what role would i-flex play
in that sense? Is it going to be a proactive role, are we looking at certain segments more actively?
Rajesh: See, as I said earlier that we have a very clear strategy where we are looking at acquiring
companies and this strategy is really focused on number 1 looking at companies which have
products which are complementary to FLEXCUBE and that sort of takes us immediately outside
of India mainly in US and Europe and second is to look at organizations which may have deeper
solution kind of relationships with financial industry, the kind of customers that we would like to
acquire in the new regions where we are going US and Europe, where they have deeper
relationships with them and so that is our strategy. In terms of industry consolidation, as far as
we are concerned on the reverse side, I don’t think we have any plans or we have any discussion
or anything with anyone. In terms of you know the things that we have seen recently that
software companies buying BPO companies etc, that is my personal opinion and not I-flex view
that some of those kind of consolidations will happen more and Indian companies buying some of
the US or European companies which make sort of synergy with them where the valuation of the
Europe and US companies are right now very down whereas the Indian company valuations are
coming up, those are the things which would likely to happen because they make synergic sense.
Amit Khurana: Okay. Just one more thing, Could give us a broader profile kind of on the lateral
hiring that we have done in the current quarter. I mean are these essentially client facing people,
is it, what is the general split across marketing and software developers.
Mak: We have added clearly significant recruitment, which has happened in terms of increasing
our sales and marketing force especially in the different markets, but as you know, we have lot of
domain experts which we take to augment our delivery capacity and lot of laterals we have got
are actually working in our delivery teams in a project manager, relationship manager, team
leader, and the domain specialist kind of capabilities. So, I would say that almost 80% or more
than 80% would be towards the delivery augmentation.
Amith Khurana: Okay. Finally one clarification; there was I understand some one time
expenditure that was there, was that essentially related to the infrastructure creation which was
earlier mentioned during the call?
Deepak: Sorry, we didn’t get that question.
Mak: Which one time expenditure?
Amit Khurana: I understand some expenditure being incurred because of which our EBITA
level income has actually shown a slight dip. <audio not clear>
Deepak: Sorry, I cannot get your question.
Amit Khurana: Okay, I said I will just take this offline Deepak, we would carry on with the call.
Deepak: Okay fine.
Moderator: Thank you very much sir. Our next question comes from Mr. Anil Padwal of
Krishna Kumar: Yeah, hi. This is Krishna Kumar. Many congratulations for good set of
results. Can you highlight us to what is your engagement with the IFC is and how scalable and
what could be the additional work that you would be able to kind of get out of IFC going forward.
Deepak: Do you mean IMF.
Krishna Kumar: IMF, sorry.
Deepak: Rajesh you want to answer?
Rajesh: Yeah, the IMF… the first win that we had with IMF, was based on a tender, which was
our typical FLEXCUBE product sale. They had a tender out that they wanted to replace their
existing system in the area which handles lending operations in all the 183 countries which was
an in-house legacy system and it is a traditional product sale where we have license fee,
customization, implementation, and the project has been going on for sometime. Sometimes
around middle of this year we hope to finish the project and then it would be the traditional AMC
cycle. Now as Shanx had mentioned earlier as the policy, we don’t give exact number for an
individual contract, but it is a sizeable sale you know in excess of $5 million. But after that
project we have gotten, clearly IMF has been very happy with us not only for their own project,
but they have been a very good reference point for us and a requirement emerged in IMF about
doing business intelligence, and analysis of 20 years of data that they have about all these
countries and lending, and we pitched in our Revelues product which is a data warehousing
product and we got a subsequent order which is a separate order for Revelues including the
business solution packs. Of course that is much smaller than the whole FLEXCUBE deal. So
that has increased the deal size and then you know for both FLEXCUBE and Revelues we should
continue to have AMC. So, this is a very significant order for us in terms of both size and
prestige and I believe that, as it happens in many cases, once a customer is delighted with you,
you do a good job, they could be other opportunities in the area of ITSG, cross sell, or extending
the FLEXCUBE module or value to it. Deepak this quarter it is in the top 10 customers isn’t it?
Deepak: Yeah, it is in top 10 and I will just add to your point. IMF funds lot of banks on the you
know financing of the automation and I think that is where you also can get a one more point of
strength that IMF itself uses the FLEXCUBE, then you know that gives us some force of strength
to the sales and marketing side.
Mak: It is excellent leverage into getting outside of IMF.
Krishna Kumar: Does this also mean that you will be able to do some more traditional product
sales in different locations of IMF worldwide?
Rajesh: No this is IMF headquarters at Washington. This is where their systems run and you
know in other locations are sort of more front-end location. The processing is all done centrally
done in DC.
Mak: Yeah, the system, which we are talking about, is the global lending platform. So, it will
handle their lending operations around the world.
Krishna Kumar: But the physical system is situated in Washington DC?
Krishna Kumar: Okay great. Thanks so much.
Moderator: Thank you very much Sir. Next we have Mr. Pramod Gupta from Enam Securities.
Pramod Gupta: Yeah hi. Congratulations on very good set of results. Couple of questions I
had. One is that last year during the first nine months we had about 34 wins in the product side,
this year we had just about 20 wins, and in spite of that order books has actually, and in the first
nine months we have also booked very heavy revenues on the product side especially the license
fees and in spite of that our order book is looking up. So, if you could explain what has led to
that, is it the bigger deal size or am I missing something?
Rajesh: See basically as I you have been pointing out that the FLEXCUBE deal itself is a unique
kind of a deal which is not just for one quarter but for 12 quarters. So that has suddenly increased
you know the average win size. Also, there have been deals, which have been much bigger.
Each year, we have shown in the last one or two last two or three years that the average deal size
license fee size has increased. Even in the IPO prospectus we had highlighted that point. So, that
trend has continued whether it is an Egyptian win or the ABC win or IMF win or Citibank win,
these are all sort of bigger wins than what we had in the past year and the past year wins are
bigger than we had. So, this is a natural process of maturity of a product you know as they call
the <audio not clear> S Curve and that is primarily the reason. Although I probably do not agree
that even the number of deals that we will do at least on a calendar year basis would be less than
the last deal, Mak can comment on that. I am in Singapore and I don’t have all the each and
every quarter for the last year and all in front of me. But any way the effect has been basically
because our profile of the customer is increasing, the globality of the customer is increasing, the
size of the deal is increasing, and we hope that you know last two-three years it has continued this
kind of a trend.
Pramod Gupta: And what is the kind of scene in the market. Are we seeing lot of new banks or
kind of new deals being closing or is it like this year as such has been slightly slower than the last
year in terms of overall number of deals that has been closed.
Rajesh: I would clarify this answer. It is a more regional answer I would say because each
region differs in what is happening at a particular given time in that region and which is where
you know another of far hedging policy of you know really spreading about FLEXCUBE in 51
different countries has helped because in some quarter you will see or some set of quarters you
would see that a particular region or a country there are not many deals happening. But to answer
your original question, since we do not have the intelligence to monitor all the wins of all the
customer, the best source of their information is the IBS annual survey and luckily you know,
within the next month or so that should be out. But what we have sort of seen generally the wins
that people report you know our typical competitors that this year they have reported lesser wins.
So, that may not mean that they have reported all their wins, etc. So, I think if you just wait for a
month or so, we will get the authentic worldwide results. In our case, we believe that the
momentum has continued both in case of number of actual wins and the average size and the
profile of the customer, <audio not clear> know where we stand this year and but unfortunately
all the league tables are January to December and they are not sort of financial year basis, so
picture is little skewed by one quarter.
Pramod Gupta: That is all. Thank you very much.
Moderator: Thank you very much sir. Our next question comes from Mr. Saurabh of ABN
Saurabh: Hi sir. Congrats on the excellent set of results. Couple of questions, one is the new
client addition which you have indicated in the product space, does it include repeatability of
deals, for example you would be having retail and core banking deal from the same customer.
So, do you count it as a single customer or is it two?
Deepak: No, we consider it as single customer and there is no repeat customer taken as a new
Saurabh: Is it theoretically, the number of deals would be more than the number of customers
you have signed?
Makarand: Yeah, it is possible that in the quarter we would have had some repeat orders from
Saurabh: Okay, Okay, Okay. Second, is this quarter your AMC revenue were far more subdued
in the sense if one takes a call that you derive certain percentage of your cumulative license fee as
your AMC revenue. Why was this observed this quarter?
Rajesh: Basically revenue <audio not clear> will not go down in absolute terms because we are
always sort of billing accruing it on a monthly basis. So apart from some cycles that you know
some AMC may be starting or finishing anywhere. It should always remain stable, but this
quarter what has happened is that the percentage of the license fee has increased. I mean the
license fee absolute terms has increased and therefore that percentage has gone down as Shanx
had mentioned that in the you know as you sign deals and I think we went in detail in the revenue
recognition and actual policy compared to last year you know, the license fee was accruing to
about 34% which has now gone much higher than that because of the license fee. So AMC as
such is not going down, but the percentage of license fee going up, the other percentages are
looking relatively smaller.
Deepak: Yeah in fact if you look at the total product revenue, it is this quarter it is 15%, last
quarter on the lower basis it was 16%. So, I don’t think that observation is true that the AMC is
down. I think AMC will be constant in absolute terms or will actually grow, slowly increase, but
percentage wise, it will definitely look different based on how much license fee and other fees get
accrued in that particular quarter.
Saurabh: Yeah, I am talking in absolute amount because like your AMC would be a certain
proportion of the license fee which you would have booked over the years. So, theoretically since
you have seen a very strong momentum in the license fee in the last four-five quarters, again that
should come in your strong growth in AMC going forward?
Rajesh: That will come after you know one year or one and a half year. AMC typically kicks in
after the whole project implementation is over and then after there is a warranty period of
whatever 60 or 90 days or 120 days, and then the AMC kicks in. So, AMCs face difference from
the license fee booking is whether three months, six months, or one year. So, the AMCs which
would have happened last year would sort of start accruing this year and therefore every year you
will see that the absolute AMC goes up. Of course there could also be cases where some of the
old customers may have you know merged or may have closed down something or may have not
continued AMC, but that is a one in a hundred kind of proportion. So, AMC theoretically and
what we have seen so far should continue to remain the same or go up.
Makarand: In fact if you see between the two quarters, it is very stable at about 17 crores
Saurabh: Right., right, right;
Mak: And the small difference could be because of the different exchange rates gets applied.
Rajesh: I mean in the fluctuation of dollar you know those kind of things may change
something, but in actual terms, the AMC should not go down, but percentage term obviously
quarter to quarter it will vary.
Saurabh: And finally like this reduction in your order book, is it more of a technical point that
you had a larger bookings of license fee this quarter or it was because of a higher recognition
from say Citigroup, like what is the main reason, or you have seen some postponements of dues
which you were anticipating in this year, this quarter.
Shanx: As I said when I covered that point, it is a combination of basically the number of
milestones that happen in any quarter really varies from quarter to quarter in terms of product
execution. So, unless the change is very significant, I would not read too much into it in terms of
either acceleration or deceleration of momentum.
Saurabh: Okay fine. Thanks a lot.
Shekar Singh: Hello. Sorry to intervene right now, but we are running out of time, can we have
the last question please.
Moderator: Sure sir. Our next question comes from Mr. Firoz Guzroli of HDFC Securities.
Firoz Guzroli: Yeah hi. Congratulation on a good set of results. The first question is related to
the gross margin for products. Now the gross margin has gone up for products, but can you
explain that because your license revenue has come down and your implementation revenue has
gone up. So I would believe that license revenue the gross margin would be higher. So, can you
just explain that.
Deepak: Yeah. If you see the product gross margin last quarter because September quarter was
around 74% gone up to 76%. Right. Are you referring the same one?
Firoz Guzroli: Yeah.
Deepak: Yeah. So there is a 2% increase in gross margin and that is mainly basically because of
the projects which are going on and there is reduction in travel cost of around the kind of
percentage that we are talking about mainly comes from reduction of travel cost and this is
mainly because the travel happens and people go there and stay for the implementation and the
quarter in which they actually traveled the travel possibly will get booked and while the
implementation is on that cost will not come and hit you and that is the main reason why the cost
of sale is down as compared to the last quarter and that has really affected the 2% increase in
Firoz Guzroli: Yeah, thanks. And second question is related to again the implementation
revenue. Now that has gone up from 25% of product revenue to 37%. So there is in rupee term
from 27 crores has gone up to 41 crores. Now I just want to understand whether is this because
you know in Q3 last year, you had added some 16 clients. Now, is that the lot of implementation
is being done for them and that is being reflected in Q3 and it will not repeat in Q4.
Deepak: You are absolutely right. I mean that is rolling effect that will come. Whether it will
get repeated in Q4 will depend on the length of the project, which is on and the projects, which
are rolled out also to the quarter will continue to have the implementation.
Firoz Guzroli: Yeah can you give us sense of how long before the implementation revenue starts
kicking in? Is it six months or ten months.
Deepak: It depends again from bank to bank and from kind of products that we have sold as
Rajesh was mentioned about UBS, Universal Banking Solution and retail banking takes a longer
period of implementation while FLEXCUBE corporate with a start up bank will take the
Firoz Guzroli: Okay, so can we presume that what we are seeing this as rise to 42 crores is
because of the 16 clients added in Q3 last year.
Deepak: That is one of the reason and the second reason is that a lot of, I mean the Citibank
rollout which is a very big order, a lot of countries have been rolled out <audio not clear> I think
four or five new countries were rolled out. In Citibank context what we were doing is rather than
billing it monthly, so billing certain milestones of implementation when the country goes live.
<audio not clear>.
Deepak: <audio not clear> countries of 5 countries rather as compared to the earlier period.
Earlier period it was three countries and that has given that effect and that is <audio not clear>
Rajesh: Basically, Firoz, I think we all have to sort of understand and appreciate that it is a very
complex model as far as the overall product business is. More wins as far as the product business
showing increased average license size, the deliveries happening on time and you know on a
slightly more scalable basis, which is an annual basis, it is clearly showing a growth pattern.
Quarter by quarter to analyze it to this level <audio not clear> I mean next quarter it could be
completely different because you know totally six implementations happen in one quarter
finished and then next quarter nothing happened and then just first day of the subsequent quarter,
three more happened. So, as far as possible, we are giving all these numbers just to completely
transfer into you, but you know we will request that don’t get confused too much by it. The basic
indicators are the momentum in the sales, the kind of sales, size of sales, tank size, and the
success of implementation.
Deepak: And last year on yearly basis we had 35% license fee in the products revenue and nine
months we have got 51%. Okay, so it has gone up much in the first nine months. So,
implementation effect of that naturally will come into that.
Firoz Guzroli: Yeah, I just want to squeeze in the last question, can you just tell me what is the
average billing per customer and how is that changed sequentially.
Shanx: I think we will report that the number on the annual basis.
Makarand: That is not the number that we share on a quarterly basis, because it really is not too
meaningful on a quarterly basis.
Firoz Guzroli: What was it last year?
Makarand: End of March, it was $720,000 in the license fee.
Firoz Guzroli: 720,000?
Makarand: Yes, 720.
Firoz Guzroli: 720 is the license fee? Sorry I didn’t get that.
Makarand: Average deal size was $720,000 as on March 31, 2002.
Firoz Guzroli: Okay thanks.
Rajesh: License fee part of the deal. Because you know the other part of the deals can vary. So
what we are reporting is the tank sizes in license fee and the average deal size is the license fee of
the deal. Now there would be other revenue for the deal. So, this is not the total deal size
average, but this is the license fee deal size average.
Firoz Guzroli: Yeah, but can you give a range as to what extent can it vary? What kind of your
largest customer, what kind of contribution would he make?
Rajesh: If you use a rule to sort of eliminate some special deals like Citi, which could be you
know very high, but there are very few banks like Citi, but a typical deal that you sign you know
will be very close to that average you know 250K to couple of million dollars, that is how the
average is there, but of course you know the Citibank deal or some very very huge deal like that
of that year change the sort of pattern and there could be you know some deals that we may sign,
which is an existing MicroBanker customer going to FLEXCUBE. Plenty of customers have
already paid us license fee for MicroBanker but it is in our both interest to move him to
FLEXCUBE and that we could charge some you know some simple or very very license fee you
know 100,000 or something like that. But typical new FLEXCUBE sale would be about you
know $400,000 or $500,000 and go to you know $10 million.
Firoz Guzroli: Okay thanks a lot and all the best. Bye.
Moderator: Thank you very much sir. At this moment I would like to hand over the floor back
to Mr. Shekar Singh of DSP Merrill Lynch for final remarks.
Shekar Singh: Thank you very much. Ladies and Gentlemen. That concludes this conference
call. Thank you for your participation.
Moderator: Ladies and gentlemen, thank you for choosing CyberBazaar’s conferencing service.
That concludes this conference call. Thank you for your participation. You may now disconnect
your lines. Thank you and have a nice evening.