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POLARIS SOFTWARE LAB LIMITED
Q4 Earnings Call
April 27, 2007
Moderator
Good evening ladies and gentlemen. I am Suresh, the moderator for this conference.
Welcome to the Polaris Q4 earnings call. For the duration of the presentation, all
participants’ lines will be in the listen-only mode. I will be standing by for the question and
answer session. I would like to hand over to Mr. R. Srikanth, CFO of Polaris. Thank you
and over to you, Sir.
Srikanth
Thank you, ladies and gentlemen. Welcome to this conference call Q4 financial year 2006-
07 of Polaris Software Lab Limited. Our income has grown from the level of Rs.825 crores
during the last financial year to Rs.1032 crores during the current financial year resulting in
an increase of 25.1%; our gross profit has grown up from Rs.263 crores to Rs.374 crores
resulting in 42.2%, and as a result of this our EBITDA has grown from Rs.77 crores to
Rs.161.27 crores resulting in an increase of 109.3%. Our profit before tax has gone up by
251.1% from the level of Rs.34.45 crores to Rs.120.97 crores, and our profit after tax from
the level of Rs.21.3 crores has grown up to Rs.101.06 crores resulting in an increase of
374.3%.
I am just looking back at the quarterly performance of Q4. Our income has increased to
Rs.270.77 crores from the level of Rs.198.85 crores resulting in an increase of 36.17% on a
year-on-year basis. Our gross profit has increased from Rs.58.36 crores in Q4 of last
financial year to Rs.90.15 crores during the current quarter of financial year 2006-07
resulting an increase of 54.47%, and as a result of this our EBITDA has gone up from
Rs.11.35 crores to Rs.32.15 crores resulting in an increase of 183.25%. Our amortization
remains flat and our PBT has gone up by 506% from the level of Rs.3.93 crores to Rs.23.84
crores, and our PAT has gone up by 906% from the level of Rs.2.12 crores to Rs.21.39
crores.
Let me touch upon some of the key metrices on our revenues and clients. As I have said
earlier, our total revenue on a year-on-year basis for Q4 2007 compared to Q4 2006 has
gone up, and the number on a year-on-year basis is 36.17% as against the previous quarter
of 34.77%. Our Intellect net revenue on a YoY basis has gone up in Q4 by 251.13%. As I
said earlier, our PAT has gone up on a YoY basis to 905.67%. During Q4, we added 12
active clients and our repeat business is 88% in Q4 as compared to 86.5% in Q3. Our net
headcount has gone up in Q4 by 260 people as a result of that our employee strength is
8668, which includes Optimus, being the BPO arm of Polaris.
Let me touch upon the balance sheet. Our shareholder funds have gone up from Rs.540
crores to Rs.601 crores, and secured loans have gone down actually by 0.6% and deferred
tax liability has gone up by 51.17 lakhs. Our gross fixed assets addition was Rs.35.94
crores and net fixed assets addition is about Rs.29.9 crores. Investment includes
investments in our subsidiary companies viz. NMS, Adrenalin and a few other companies.
Deferred tax assets have come down. Cash and cash equivalents have remained flat with a
slight movement from from Rs.121 crores. Sundry debtors is basically in the context of our
business. Cash Flow remains self explanatory and as you are all aware, we have done one
dividend payment in the beginning of the current financial year. First Interim dividend was
declared in Q3 . The second interim dividend was declared in Q4 and the same has been
brought under cash and cash equivalent, as the actual disbursement to the shareholders
were made in second week of April.
Now let me talk about the revenue split. In Q4 our BFSI was 88% and our emerging vertical
is 12% as compared to 89% and 11% in the preceding quarter. The total Revenue was
Rs.271 crores, consisting of Rs.9.3 crores from Optimus. Intellect revenue was Rs.55.9
crores as against Rs.50.68 crores in the previous quarter resulting in a jump of over 10% on
a quarter-on-quarter basis. And if I were to compare vis-à-vis the same quarter of the last
year, it grew by 251% . Our services revenue was Rs.214 crores for the previous quarter as
compared to the current quarter of Rs. 206 crores. It was 178 crores in Q4 o5-06.. On a
quarter on quarter basis, our Citigroup revenue was flat and our non-Citigroup revenue has
gone up by 6.56%. Our fixed bid contracts is about 17% of our revenue and time and
material business is about 83% of our revenue for the current quarter.
Our geo concentration for the current quarter is as follows : North America is about 34.4%,
EMEA is about 32.6%, India is about 11.96% and Asia-Pacific and Japan is about 21%.
Now I will come back on the revenue mix of onsite and offshore; in Q4 our onsite revenue
mix was 57.9% as compared to 58.5% in Q3 and as compared to 52% in Q4 of last year.
Similarly for offshore, our revenue mix was 42.1% as compared to 41.5% of Q3 of 2007, and
as compared to 48% of Q4 of last year. Our rate per hour for onsite for America and EMEA
was $68.53 per hour as against $68.6 per hour for the preceding quarter. The overall Onsite
rate was $59.67 per hour as against $59.75 per hour. Offshore average was $19.32 as
against $19.27 in the preceding quarter. Revenue Contribution - Our top client is 11.1% , top
five clients is 34.5%, and top ten clients is 48%, and Citigroup is 40.6% as compared to
43.8% of the preceding quarter.
Now I will give details for the Citigroup revenue or non-Citigroup revenue for the current
quarter compared to the previous quarter. Citigroup revenue was Rs.110 crores for the
current quarter as compared to Rs.120 crores in the previous quarter resulting in a drop of
Rs.10 crores in Citigroup revenue for the current quarter., Non-Citigroup revenue has gone
up to Rs. 160.84 crores as compared to Rs.153.97 crores in Q3. resulting in a increase of
about 5% and in dollar terms about 6.5%. The total employee strength for Polaris including
our Optimus BPO is 8668 as compared to 8408 in the preceding quarter consisting of
90.25% of software professionals and 9.75% of sales and general administration associates.
Our net addition were 260 people during the current quarter resulting in a utilization of
73.19%. We have incurred Rs.35.64 crores towards gross capital additions during the
current year for entire PSL including Optimus. Our tax for the current quarter was based on
the cumulative tax provision for the entire year’s earning before tax. There were about Rs.1
crore tax credits given in the Q4 and considering the cumulative provisions of tax of entire
year, the Q4 tax provisions that got adjusted resulted in a tax reversal of roughly Rs.1.5
crores as a whole, In other words, the cumulative tax provision as a percentage of PBT on
an year on year basis is in line with the actual working. With these words, I leave the floor
to Arun.
Arun
Good evening. Thank you all for participating in this call. I think all the results are in front of
you. At Polaris we are excited about Rs.1,000 crores revenue mark. I think it is a major
milestone for any organization when it comes to Rs.1,000 crores. It may not be as important
for industry analysts when you have seen so many companies’ profits crossing Rs.1000
crores, but when we are looking internally as a organization it is important. We have set up
a new set of processes, new set of systems, and new set of engagements to cross this
milestone. When I look back at the entire set up in the beginning of 2006, we had a
challenge of 60% revenue coming from Citigroup and rest of the revenue was very small
compared to the overall increase. To grow 25%, we had to grow non-Citigroup revenue by
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60% and that was a challenge which was visible to all of you, as analysts; whenever you
were discussing with me you asked, “How do you plan to grow 25% because you have to
grow non-Citigroup to over 60% to make it reasonable growth “?I think Polaris Sales team
delivered that 60% growth on non-Citigroup accounts which was merely a meagre number
of $20 million per quarter to $36 million per quarter this period and that is an interesting point
of celebration here, celebrating the nexus of all the investments we have made on Intellect
over the last three years
I think our growth is a systemic growth on Intellect over 100% on a year on year. The
Intellect net revenue contributing to Rs.56 crores per quarter. This is first of its kind entry
into product business. In the first year, the business was significantly visible and I think that
is a critical point I want to highlight to the analysts here that in this business, in spite of the
flat revenue for this quarter, we had grown 10% in Intellect revenue. Since, we were able to
get into the product business with the latest technology; compared to our competitor we
have an advantage going forward. This technology proved successful because it is non-
restrictive in nature and it enables the organization to modernize their legacy platform which
is going to be the biggest business coming up in ensuing years. If you look at any research
on the banking domain for the next five years, the results coming up in U.S. and Europe are
in the area of the smart legacy modernization and in that respect our technology is rightly
suited. The acceptance we are getting is showing in the successful results during the last
four quarters.
On Customer account, we started in 2004-05, with just 20 accounts and moved to 70
accounts at the end of this year. We have 15 AAA accounts, 16 AA accounts, and 28 A
accounts. Very interestingly our account landscape is very global in nature. We have the
best banks of Australia, best banks of Singapore, best banks of U.K., best banks of America,
best banks of APAC region as our customers. I think that is the beauty of our strategy!We
were focusing on entry into Top 100 banks in the world. And now, our ability to enter in to
top banks through Intellect has been validated. We are able to get the CXO’s and Business
Managers’ “ears”. But this process , in its initial phase requires higher marketing dollars
because whenever you enter into large banks initially we need to invest into POC (proof of
concept) and these costs are all written off in our books. In spite of that we were able to get
Rs.1000 crores revenue last year. With those live sites coming into play, we are getting
visibility into the marketplace with the live sites becoming reference sites for us to
implement the same solution in other customers . Overall, we are starting the new year
2007-08 with 70 accounts and we are starting this year with the non-Citi revenue close to
60%. So, our growth projection is over 25% .. We are comfortably positioned to achieve an
annual growth rate of 25%.,there may be small glitches are there here and there on quarterly
targets, but overall 25% on annualized basis we are comfortable going forward. Besides
this, I think we will be able to manage our people attrition effectively. Our attrition level is
low in spite of the demand in the marketplace because of the specialization which we are
looking at. If you look at the recent Forester 2007 Strategy report on Mid cap companies,
they are talking the same thing which we talked to you three years back that for a company
of our size had to focus on sub-verticals not BSFI. Therefore we launched two centers
“The Capital” in the month of September 06 and in the month of March 07 we launched Risk
and Treasury as a super specialty center. . The Capital has got more than 1200 people
who are working on investment banking and this is a unique center by itself and has
precisely over 500 consultants who are working in that area. So this highlights the future of
mid size tier-2 companies that are from India. Companies in the size of $200 to $250 million
company have to specialize and I think that is helping us out in working without difficulty in
this line of business.
So, let me stop at this point of time and leave the floor for the question and answers session.
Thank you for joining for the quarterly investor call. I would just like to say that this quarter
has been better compared to the previous quarter. I think we lost Rs.10 crores worth of
revenue in Citi group last quarter. I think as you all know Citi Bank has gone through very
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significant events in the last quarter; some of the projects have got delayed, and that
resulted in this kind of a shortfall in the revenue and that is the Rs.10 crores number. It is
due to the foreign currency impact which all the companies are going through. I think we
could have been better off at this point of time on this platform if that Rs.10 crores had not
been impacted. The sudden situation in the Citi banks resulted in that shortfall. Let me
now leave the floor for the questions and answers session.
Moderator
Thank you very much sir. We will now begin the Q&A interactive session. Participants who
wish to ask questions, please press *1 on your telephone keypad. On pressing *1
participants will get a chance to present their questions on a first-in-line basis. Participants
are requested to use only hand sets while asking a question. To ask a question, please
press *1 now. First in line, we have Mr. Sumit Poddar from Arundhati Securities.
Sumit Poddar
Hello sir. Congratulations on the annual results. Can you please throw some light on how
could we see the margins going forward in FY08 because we see sequentially the margins
have nearly gone down substantially?
Arun
Yes, I think the margin growth has gone down especially in this quarter. Though the margin
was improving in the earlier quarter, I think it has shown some dip because of the revenue,
which is not according to expectation. It is not a margin shortfall, it is a revenue shortfall of
$2.5 million. Marketing costs are going up. We are intentionally investing in the sales and
marketing. I can cut down some of the leaking pipes in our margin, but we are intentionally
taking those decisions; so going forward the margin growth will happen when the sales and
marketing problems get stabilized to a level where we need not invest more numbers in
sales and marketing, and our revenue growth as against cost will become a higher
percentage of a total increase in growth.
Srikanth
Just to add to what Arun said, Arun also mentioned that a couple of projects did get delayed
and we had already planned for the resources and the delay happened because of the
restricting things that are going on in Citi side, and therefore it took us a little time to redeploy
some of those resources and some of those overheads are also factored into the margin
loss that you are seeing.
Sumit Poddar
Okay, so what is the kind of ban that we can see going forward because even the salary
increase is one of the advents that we will see in FY08 and also, the dollar-rupee rate.
Summing up, what is the kind of range that one should be looking around for the margins?
Srikanth
Before this dollar-rupee crisis setting the less than 41 mark, we did the business planning
which we did at 43.5 or so. We were looking at our margin growth of at least 30% plus for
the year. This includes taking care of the salaries using other things, but with respect to the
rupee-dollar impact, its duration and quantum, we are battling with the exact calculation as
to how much margins should be there. We are going to take all other considerations like
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salaries and other things, and we expect at least 35% growth on the margin on PAT going
forward in the business. If the currency fluctuates widely, it will have an impact on our PAT.
Sumit Poddar
And how do we see the Citi account going forward. Is it that we are trying to defocus from
there or the other places as such or it will still be going at a slower pace. I mean, what is the
strategy as far as Citi account is concerned?
Srikanth
I think Citi has defined a new policy now. Citi has got 17,000 jobs as per the policy
announcement and they have reduced the number of vendors. As we are the sole partners
of Citi, we are likely to get a higher volume of business from Citi. Citi is doing sound by all
dimensions, and there is no question of Citi being defocused. Citi is having five accounts. In
this period, we have to consolidate number of vendors to less than 20 vendors. So, other
than that you are likely to get the benefit of growth of the account.
Sumit Poddar
Okay great. Thank you so much.
Moderator
Thank you very much sir. Next in line, we have Mr. Nayan Mehta from Techno Shares.
Nayan Mehta
Good evening. Congratulations on the annual numbers. I would like to ask this on the
margin front. Basically you have attempted to give an explanation but I think in the figures
you had mentioned about increasing the EBITDA margins to mid-20s in the next two years in
fact by 2009. How do you plan to achieve that current 16% and secondly, in the last six
months, we have not added a single AAA client. The AAA clients number remains at 15
since 2006. What is happening on that front? You have been little slow also on adding the
AA clients despite the fact that the capital has now actually been quite active and we have
been ruling at 10% at pulling speed. So, can you speak a line on that?
Arun
Okay, just to tell you about AAA account, something like one or two accounts per quarter is a
good success. During the recent wo quarters, initially it was 12 then it became 13, now it is
15 AAA accounts. They are getting added at the rate of 1 or 2 per quarter. So, I think we
will just recheck the data, and if the data differs, I will request Srikanth to send you the
update. Similarly about AA accounts also, I think it was 12 accounts earlier, it is now 16
accounts and these are the large banks which take normal settlement time. If you take AAA
and AA together, we added three accounts per quarter. Obviously, we are targeting at a
margin of 20% EBITDA because in this year’s second quarter, we moved from 15.51 in Q1
to 17.9 in Q2 to 17.30 in Q3. When we are talking about 17.90, the dollar rate was Rs.46,
and now it has come down to Rs.42. The EBITDA margin was impacted by the currency
appreciation & drop in citi revenue.
Nayan Mehta
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So, now if you are going to take a little longer, then in that case will there by any significant
change in the Intellect or any of the business of the verticals. Finally, will you be having
some slowdown there also?
Arun
Why should the impact slowdown? I am saying we are targeting 20% EBITDA, there is no
doubt about it in this quarter. I am saying that 17.30 EBITDA margin was there in Q3, it
came down to 12% this quarter. This was because of a policy change and secondly due to
Citi growth. If these two were not there, we would be in the range of 17.5% to 18%.
Nayan Mehta
Yes, on the Citigroup front, what kind of growth do you see going forward because here you
are seeing a de-growth., What could be the contribution of Citigroup in the current year?
Arun
Citigroup contribution as of now is 40% and we expect to grow Citigorup between 5% to
10% in the year. So Citigroup account which is over $100 million account, will grow at least
5% to 10% in this year, it can grow to higher number looking at consolidation effectiveness,
but we are standing around 5% to 10% growth on Citibank and we are planning on 60%
growth in non-Citi account. Last year with 60% in the non-Citi account, we were planning
around 40% to 50% growth in non-Citi account.
Nayan Mehta
Could you tell us about these AAA accounts, what is the size, in what revenue size they
are?
Arun
We look at AAA accounts where there is an IT budget of more than a $1 billion, and this
entry in the $1 billion account, we have potential to grow this account to $10 million in the
next 24 months time.
Nayan Mehta
And for AA?
Arun
AA, that is what is something like between an IT budget of $300 million to $500 million and
at a range of the AA account. And then rest, A account, which are already in annuity
business. So, they consist of deals which we get directly from small banks which have a
budget of $30 to $40 million budget, those we do not refer to as A account.
Nayan Mehta
Okay, I will come back with some questions later on. Thank you.
Moderator
Thank you very much sir. Next in line, we have Mr. Shaukat Ali.
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Shaukath Ali
Good evening sir. Sir, could you throw some light on the attrition rate in the current quarter
and my second question is do you see if the U.S. economy enters into a recession, how it
will affect your business?
Arun
The attrition rate in the current account was 14.52% against 14.37% in the early quarter.
Yes, with regard to the U.S. economy, first of all we definitely do not see that go down, even
though lot of talk has been going on. We definitely see that other than the Citi business, all
of our U.S. accounts are continuing to grow and we are in the process of acquiring new
accounts as well. So, we do not expect any slowdown in our U.S. business. We expect a
reasonable growth keeping in line a 5% year on year growth. A similar growth could happen
in the U.S. business also.
Shaukath Ali
Okay, thank you sir.
Srikanth
And any way this is in addition to what Arun said. We have a least exposure. Compared to
our competition if U.S. slow down happens , the impact will not be high when compared to
our competitors. We have only 35% business coming from North America compared to other
companies which is more than 60%.
Shaukath Ali
Okay, thank you sir.
Moderator
Thank you very much sir. Next in line, we have Subhashini from ASK Raymond James.
Subhashini
Sir, my question was regarding the tax rate. This quarter, the tax rate seems to be pretty
low. So, I just wanted to know what is the effect.
Srikanth
If you see the tax rate, the tax rate after deferred tax and fringe benefit tax, have actually
gone up in this quarter by 20 lakhs because these are all year-end benefits which we
normally pay in the year-end. but whereas the deferred tax actually has gone down by a
crore of rupees within the current quarter. The reason is because of the deferred tax assets
and deferred tax liabilities movement. The reasons of taxation account is actually, since we
have done the new classified accounting and the global transfers. Similar tax provisions are
being worked out based on the tax amount considering the 10A benefit and considering all
the tax positive benefits, and therefore the existing provisions are being actually deducted
and the balance provisions are being reversed during the current quarter. Only about Rs1.5
crores are just reversed in the current quarter.
Subhashini
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Sir, going forward, what is the kind of tax rate which we can expect for the full year?
Srikanth
Going forward we will have an average 16% is the tax rate.
Subhashini
Okay. Thank you sir.
Moderator
Thank you very much madam. Next in line, we have Mr. Srivatsav from Smart Capital.
Srivatsav
My question is relating to the Optimus, any client additions on what is the overall full year
EBITDA margins on the business?
Arun
We have grown by 168% during the year and considering the growth in Optimus, though it
is coming from a very small number, we are close to Rs.32 crores revenues in this year
compared to tRs.12 crores in the last year. This number, they are trying to grow by almost
80% plus in coming year.
Srivatsav
Lot of your peers are seeing billing rate improvement. What sort of billing rate improvement
are you seeing especially in the services space?
Arun
As I said we are seeing a billing rate improvement because of EMEA contract. Your working
contract, which is better, is considered, but otherwise stable billing rates are there as of now.
Srivatsav
What is the total number of Intellect that comes for this portfolio?
Arun
We will get the total number of Intellect conveyed to you; we are just working on quarter on
quarter big deals. We can check on the annualized number of Intellect and revert to you.
Srivatsav
Thank you very much.
Moderator
Thank you very much sir. Next in line, we have Mr. Rakesh from IL&FS InvestSmart.
Rakesh
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Can you tell me what would have been growth in the domestic currency terms, not in rupee
terms. Wherever the billing is happening, in that currency term what has been the growth?
Arun
I think currency growth was on an absolute number it was something like 3% to 4%, but on
quarter on quarter in non-Citi growth it is equal to 7%.
Rakesh
Non-Citi growth is equal to 7% in currency terms. Okay, and otherwise it is 3% to 4% of Citi
growth.
Arun
Yes.
Rakesh
Okay thanks a lot sir. That was my question.
Moderator
Thank you very much sir. Next in line, we have Ms Srividya from Sundaram BNP.
Srividya
Good evening sir. I wanted to check, what will be the impact of rupee on your revenues and
profits and you seem to have hedged for quarter of revenues. So, going forward how do you
plan to mitigate the impact of rupee? Would you have to take some billing rate hikes or how
do you address that issue?
Arun
Yes, I think this is an issue we are grappling with. I would have loved to give the answer for
it, but I will not be able to. We are looking at who are the customers we can go back to and
plead to stating that we are lower and they need to take a look, but that may not be
immediately possible because that is the advantage we have got as we have done for $48
million at Rs.45 rate. That is a very useful thing for us, but at this point of time I think our
global sales team may be re-looking at the dollar rates that can be renegotiated to the
customers. So, with respect to how we deal with the entire impact , I think we need to deal
with it with the industry and we do not have a straight answer. Still, may be after one or two
weeks, we may have some better answer and we will get a feedback because we never
anticipated talking about less than 41 barrier.
Srivatsav
I think you had earlier lot of forex was covered higher level last quarter, but in spite of that
your reserves seem to be very poor in terms of profitability. So what is the reason other than
if you had such a forex then EBITDA numbers would not have come through.
Arun
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Because the revenue is based on the rate at which the market is working, not at the rate at
which hedging is done. Hedging is to protect the company from the receivable what it has
and not the new revenue which gets booked. So your revenue will always be linked to the
current rate of the dollar, not the hedge rate of the dollar.
Srivatsav
But if you make through all of this, where would it lead?
Arun
I would have taken a loss of another Rs.5 crores in the other income column because
receivable is there.
Srikanth
As far as the revenue is concerned, then it is basically keyed with the current transactions
made, but hedging of the previous quarter end, i.e. Q3 end is only protecting our correction
risk and we have not even done that since it is probably not in our list, as well as the
hedging. Having said that our hedging strategy seems to be a very ongoing strategy on a
long-term basis. At the cost of forex, all the forex assets which we are having, mostly to the
debtors and creditors, those have to be reinstated based on the processing rate. So,
because of that also we are keying for the current sops. Therefore, this scheme will only
revert a collection loss at least not towards the revenue loss.
Srividya
What is the impact on the current quarter sir?
Srikanth
Yes, I will just repeat what is in the sheet as to where exactly the impact is. It is close to Rs.8
crores because of hedging profit and goes to Rs.8.5 crores because of reinstatement for
ESTE and debtors and so on, resulting a forex loss of Rs.57 lakhs for the entire year.
.
Srivatsav
Quarter 2.
Srikanth
For the quarter, it was Rs.342 lakhs because of the forex hedging profit and Rs.297 lakhs
because of the reinstatement of forex assets resulting in a profit of Rs.45 lakhs.
Srivatsav
In the terms of salary hikes, when are the hikes coming through?
Arun
Effective 1st July.
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Srivatsav
What is the expectation sir?
Arun
In line with the market.
Srividya
What will be the addition of employees in the current year sir?
Arun
The proposed addition that you are looking at is in the line of recruitment in the non-linear
model in the current year. So, we will cross 10,000 people, that is sure, as the plan gets
confirmed sometime in the end or middle of September of 2007, but complete planning has
been done based on the revenue generation this year; and in this quarter, over 2000 people
will definitely be required.
Srividya
2000 people in the full year. And how do you see the Citigroup account going forward? Is
the restructuring over and when will you see it getting back on track?
Arun
Yes, as I mentioned the Citigroup has looked at it; they need to leverage offshoring more
than what they are doing today and then view the 200 vendors they were having, they are
limited to consolidate their numbers and now their talk depends on the list that is the 21st list.
There is the likelihood that this account for us will grow but as of now I do not want to
promise the time because they are still in the final stages of closing the list.
Srividya
Thank you sir.
Moderator
Thank you very much madam. Participants who wish to ask questions, please press *1. We
have a followup question from Mr. Srivatsav of Smart Capital.
Srivatsav
My question is relating to the Legacy modernization and Polaris. If I understand it correctly,
how are clients reacting to this particular project of yours?
Arun
The whole of last year, it was the Intellect led revenue, it was just Rs.15 to 16 crores per
quarter. Now this quarter it is Rs.56 crores. So, in four quarters we have grown Intellect, a
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new model from it, something less than 10% to 20% of revenue. Now it is a Rs.220 crores
annualized revenue. We have made one of the largest treasuries go live for the largest
European bank in just 18 months in 47 countries. I think these are the examples of its
smooth performance. The last one was the most complex operation, viz. operation to be
migrated without any investment at all. Not a single deal of destruction was encountered
during the entire transition of a 30 year old system being replaced during our setting up of
operation for one of the largest European banks. I think we will hear about that story later on
from the marketplace also, but this is proof of the success of such projects and that these
projects will move on to the next level in the market place.
Srivatsav
What sort of fraction you are seeing from the core banking replacement market?
Arun
In the Core banking replacement market, we are bidding for at least two such deals. These
deals are large in nature and consist of lot of settling down, but we are bidding with the
European bank. We are in the final stage of negotiation for close of the renewal deal.
Moderator
Thank you very much sir. Next in line, we have Mr. Sudhakar from Spam Capital.
Sudharkar
Hi, good evening gentlemen. Mr. Arun you talked about FY 09 being a big year for you, you
expect a high growth coming in 2009. Could you just give us a flavor of things to come in in
2009 or may be later half of 2008?
Arun
I think the license to new deals today is still a small piece of the total Intellect as revenue.
Intellect revenues have been going up. When you are doing in a responding model in the
contract, license fee is in the $5 million range. These sizes can go up in 2008-09 by at least
two times to three times, it can go up to $15 million for the size mix; we have a license
revenue to beat at least 30% to 40% of the $15 million deal and I think that is the optimum
we are expecting as we go along in the marketplace.
Sudhakar
How is the competition out there? I believe there should be lot of competition from other
companies also, especially in the BSFI segment.?
Arun
Yes, obviously there is. As a competitive advantage, fortunately we built up our products,
though we built up our product in 2003-04, while our competition has built up the core
banking product some time in 1997-98 So, we have an advantage of six years of technology
innovation which we had ploughed into my product architecture, which my competition has
not done. For them to move towards my direction, they may require more investment and
more time for acquiring technology. So, they need some land available, if they are to catch
up faster with year 2000.
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Sudhakar
And do you believe, you will get pricing going forward? You think there should be an
upswing in prices?
Arun
Obviously the pricing is directly proportional to how our whole strategy was going to see us
in banking. The main project, which we are pitching on, is hardly getting any modernization.
Just to update on values, there is a range of $15 million to $500 million. Some of the
products are in $15 million range, which is the overall budget. We may not get $50 million,
but in the internal processing, it seems that the program managers are a bit clear that they
are going to bring in the hardware changes. It starts with $10 million to $15 million kind of a
process. Today, we are getting a small piece of it because we are establishing our credibility
right now. We can work towards a long-term success. We are operating on a range of $2
million project to $5 million project right now. As we go along and our credibility gets
established, we may get into the next phase of $10 to $15 million range on this process mix;
That is when the margins will start coming in.
Sudharkar
And what sort of investment would you have to do for a period of time, additional
investment?
Arun
Investments are ongoing. If you are writing off in the process, which is not new to the
investment bank, and because every quarter we are investing close to Rs.6 crores plus per
quarter into our technology maintenance. R&D expenses of the company are close to Rs.6
to Rs.7 crores on continuous growth. So, around Rs.25 crores budget is there for next year
for investment into the product business, So there is no incremental investment from the
investor release point of view. we have gone up by 45% increase from Rs.21 crores of third
quarter last year. We were at around Rs.32 crores this quarter, we have given a higher
leverage to the number but ideally, if I have an option, I would increase some $2 million for
the marketing side. I am slightly conservative and show that my P&L is mostly stable so that
as for the P&L revenue, more efforts will be posted quarter on quarter, I can increase my
investment in marketing and sales.
Sudhakar
Thanks and all the best.
Moderator
Thank you very much sir. At this moment, there are no further questions from the
participants. I would like to hand over the floor back to Mr. R. Shrikanth for the final remarks.
Srikanth
Thank you very much ladies and gentlemen. It was a pleasure to be on the call and we look
forward to seeing you again over a period of three quarters. If you have any more
questions, please feel free to email to my investor relations officer or to me personally and I
will make sure that the answers reach you. Thank you very much.
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Moderator
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your lines. Thank you.
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