Zensar Technologies Analyst Call Transcript on Q1 Earnings
Date -17th July, 2007
Moderator: Good evening ladies and gentlemen. I am Suresh, the moderator, for this conference. Welcome to ZenSar Technologies’ conference call hosted by Edelweiss Securities Pvt. Ltd. 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 handover to Mr. Viju George. Thank you and over to you sir.
Viju George: Thank you Suresh. Good evening and a warm welcome to all of you joining the Q1FY08 post result conference call of ZenSar Technologies on behalf of Edelweiss Securities. At the outset, we extend our appreciation to the management for giving us the opportunity to host this conference call. We have with us today Dr. Ganesh Natarajan - Deputy Chairman and MD, Mr. Parmod Bhalla - Chief Operating Officer, and Mr. S. Balasubramaniam, Chief Financial Officer to represent the company. Without further ado let me handover the floor to Ganesh for opening remarks. Over to you Ganesh.
Ganesh: Thank you and good afternoon to all of you, and thank you for joining this call. I think the Investor Update is already with you so I wont go through that, but let me just give you some salient features over the next 10-12 minutes, and then we can take questions. Overall, the health of the business is good. We have seen a good revenue growth. We have declined in terms of profit over the first quarter last year and I will give you the reasons for that.
First, in terms of revenue, I think our star business has been the Enterprise Oracle business which has been our focus business over the last six months. In fact, in terms of volume growth, we have almost 39% growth compared to first quarter of the previous year. Because of the Rupee decline, of course, it does not translate into 39%. So, it is really translated into 26% value growth quarter-on-quarter.
If you look at our SAP business which is again one of our early acquisitions two years back, they have had a fantastic quarter. In fact, they have grown 77% growth quarter-on-quarter over previous year. So the overall enterprise business has seen 84% of enterprise growth, which includes some new revenues that we are getting from Thought Digital, which is the company we acquired as you know in March.
The ITS business, which is the Innovative Technology Solutions (ITS), which as you are aware was one of our problem business last year, is doing well and is profitable. In fact, we have 60% revenue increase in ITS business. Also, some of the Application Portfolio Management (APM) businesses got transferred to ITS because they are part of the Asia Pacific region which is geographic focus for ITS platform. The problem business this quarter has been APM itself and I will explain why. While volume growth has been reasonable 20%, the value growth, thanks to the rupee and thanks to the fact that it does work primarily in UK, and US, has been only 80% plus of course there has been some about 7% which has actually got transferred to ITS in the re-classification of accounts.
BPO has been good this quarter. In fact, we had 31% growth in volumes, which translates into 17% growth in value and also of course we have invested in two sales people because we are now focusing heavily on the transaction processing business in BPO and getting some good new deals and we have put one sales manager in the UK and one in US for this business.
So, overall, this is how the business has grown. If you look at the EBIDTA, as you are probably aware, the GOS EBIDTA declined from Rs. 1764 lakhs to Rs. 1086 lakhs during this period for two or three simple reasons. Due to the Rupee of course, it declined about Rs. 3 crores. We also had a bench which unfortunately got created at the beginning of the quarter because one of our large accounts Marks & Spencer changed strategy from doing entirely application development to partly application development and partly ERP and migrating in to possibly SAP. So we had 100 people bench created primarily because one of the projects today decided to convert abruptly to ERP. We had a fair amount of subcontractors which is really in the UK and we are working on offshoring this work. So that is one of the reasons for contribution. Another project that we were doing in Holland is testing project for new port called Euromax that came to finish in March.
So, net result is that, we have been carrying bench of close to Rs. 1.35 crores over the quarter which again contributed to the problem. Then, of course, we are taking a lot of trainees and bulk of trainees we have taken, who will be employed, during the next quarter, have been again in the APM business which contributes about Rs. 97 lakhs. So, essentially, what we are saying is that if you look at all this, there is also an interest component in the whole thing while half of the decline is because of the Rupee.
OPEX is also much higher this quarter. This quarter, one is of course the standard normal increase in OPEX has been about 16% and additional 15% OPEX is incurred because of the restructuring cost of new company. The Thought Digital, as all of you are aware, is an American company. So what we have done is - we have planted a very senior team in Thought Digital. In fact our Chief Strategy Officer, Sushma Rajagopalan is actually running the company as their interim CEO and she will do that for next 9 months till we fully integrate the company and take more work offshore. The good news is that we added 8 new accounts to Thought Digital this quarter and 3 of the existing accounts have moved offshore. As I explained before, our basic goal for Thought Digital has been to convert it from entirely East Coast onsite company to an offshore company.
So, I think this summarizes the business. I think we are getting into right direction because ITS business is doing well, BPO is growing fine, and the EAS business continues to grow. Also, the Thought Digital integration is happening and it will reasonably get completed over next six months and the Japan Company that we acquired is also on target. In fact, we expect to launch our forays into animation, multimedia, gaming - thanks to what we are doing with the company as well as some new deals we are getting in Europe over the next couple of weeks or so. So, I think that is going to be a significant area. SAP, as mentioned, is doing extremely well. On the issues with APM, the bench is now more or less wiped out so I think next quarter we will not have bench problem, and also the trainees as I mentioned, will get utilized during this quarter.
As I said we have fairly reasonable hedging policy so Rupee, even if it stays at this level, or declines a little more it is not going to trouble us very, very substantially. We have good news which we are aware of is Poland Center has firmly started. We have a country manager and two sales people in Poland who will focus on Finland and Eastern Europe. We have also finished training of initial batch of 23 people whom we hired three months back and they are completing training in Pune. They will probably be back by early August and this is when we actually start operating the Poland center in this quarter. In fact, we have 24 clients during this quarter - 15 of them are some of the new services areas that we added over the last 12-15 months. Also, as I mentioned, the strengthening of services offering has been happening. We have also invested in Gartner; in fact we participated in Gartner Summit and became a formal client of Gartner at a cost of 50,000 pounds but that has been useful for us to make more forays in Europe which is part of geography strategy.
Also, there have been some good wins in APM during this quarter, which is European Railway Service. We have large Swiss biotech company which has become our client, also large retail conglomerate all in all I think things are going well. We end up the quarter with 4008 employee which is really landmark crossing 4000 mark and we believe this is really where we stay as a company. As I said, we will probably continue to see some impact of the Rupee definitely in current quarter. In fact, we have board meeting yesterday and we are still confident that I mean we can maintain close to Rs. 100 crore profit before tax (PBT) for the entire year and of course tax we are still working out. We are not sure about total impact of minimum alternate tax etc. Because of the onsite revenue having gone up due to Thought Digital, we are ending up more paying more taxes in the US. But on PBT basis I think that we are looking at Rs. 100 crores and given the tax structures that we will still translate into our overall tax. So that is really where we are. As you heard, we are all here so please feel free to ask any questions on operation, strategy, and financial.
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 touch-tone enabled telephone keypad. On pressing *1, the participants will get chance to ask their question on first-in-line basis. Participants are requested to use only handset while asking question. To ask a question please press *1 now.
First in line is Mr. Dipen Shah from Kotak Securities.
Dipen Shah: Hi Ganesh. How are you?
Ganesh: Very good sir.
Dipen Shah: Okay couple of questions from my side. First of all, just wanted breakup of the revenues and EBIDTA on organic basis, as to how much growth been and how much is from Thought Digital?
Snigdha Aggarwal: The organic revenue increase is entire 21% and for Thought Digital, the EBITDA is near zero at this moment.
Dipen Shah: The other question is how much is the salary increases been given from the current quarter?
Ganesh: About 14% is overall salary increase. The range is between 8% and nearly 25%, the average comes 14%.
Dipen Shah: This is for offshore or including onsite also?
Ganesh: It is really offshore. Onsite is we do not do salary increases generally more on case-to-case basis and probably leverage to about 2.5%. This 14% covers the whole about 60% of staff. There are a lot of people who have joined during the year so they are not impacted that much.
Dipen Shah: Okay and next thing is how much forex hedges do we have now and at what rate?
S. Balasubramaniam: We have roughly covered about 60% of outstanding at this point of time. We also have a three option contracts which run for the next two years now, last year around this time. The average rate that is about Rs. 43.80.
Dipen Shah: And if I heard correct Ganesh, the impact of the bench you say it was Rs. 1.35 crores and that of the training was about Rs. 97 lakhs, is it correct?
Ganesh: Yea that is right. Rs. 1.35 crores is bench and Rs. 97 lakhs is training.
Dipen Shah: And as you said, the bench is almost non-existing right now?
Ganesh: Bench is not really there. There are about twenty people on the bench. So, if you look at equivalent, you are talking about close to may be Rs. 18 lakhs. The trainees are still there but they will be deployed during this quarter.
Dipen Shah: And last thing is in terms of BPO. How is the profitability on that business because we have, I think, regrouped the business into another business?
Ganesh: This quarter is a loss. If you look at BPO business, loss is not because of any operation but because of the two sales persons, one in the UK and another in the US. I think overall we are still looking good for the year.
Dipen Shah: Okay thanks very much. All the best. I will come back for more, if I have any further questions.
Ganesh: Certainly Dipen thanks.
Dipen Shah: Thank you very much sir.
Moderator: Next in line is Mr. Jaideep from Equity Intelligence.
Jaideep: Mr. Ganesh I appreciate you having this conference every quarter and you know one thing I have experienced I have been investing in this last many years in the portfolio management scheme and we found you know something, this company is lacking behind the good companies in software segment by the market cap and I feel strongly the management has failed to create wealth for the shareholders by appreciation in the market cap of the company in spite of the repeated good things talked about the company and the acquisitions happening in the last quarter and today we are on 750 crores market cap which is very low valuation comparing size of the company and we are talking about.
Ganesh: You are absolutely right. In fact I mean if you follow the company you will realize that I mean we have really been in business as an offshore company for about 6 years now and we are really giving for a loss making company to building a model where we have to acquire offshore plant. So I think the good news is, we are really not building it for the stock market but if you really look at the valuation appreciation has been over 50% over the last 8 months or so which is good, but I agree with you, we are still undervalued and rightly so.
Jaideep: It is fine. Thank you Ganesh, all the best.
Moderator: Sure sir. Next in line is Mr. Adil Shah from SSC Mehta.
Adil: Can you repeat factors for fall in margin from 14.2 in Q4-07 to 9.7% in Q1-08?
Ganesh: Rupee has accounted for about Rs. 2.86 crores which is nearly about Rs. 3 crores, Rs. 2.86 crores out of Rs. 6.7 crores, and the bench which was created because of one project being converted to ERP and another Dutch project come to an end, costs about Rs. 1.35 crore which is carrying cost of bench which is more or less liquidated, we hired management trainees during the quarter, which will get utilized during the current quarter. So that contributed about 96 lakhs and our OPEX increased around 161 which is about 50% of that is because of some restructuring cost. We have send management team to takeover the management of this acquired company. So out of Rs. 1.61 crores about Rs. 80 lakhs is because of restructuring of the new acquisition and Rs. 80 lakhs is normal increase in OPEX.
Adil: So we can expect for financial 2008 the net margins will come back to 10%?
Ganesh: I would hope so because depend on what the taxation but I would certainly expect that we will come back to last year’s margin.
Adil: Sir what are the margins levers you are counting on?
Ganesh: We are counting on two or three things. One is that we have approached all our customers. In fact all our customers have received letters from us asking for rate increase and about 14 of them have already confirmed that they will do so we expect between 3-4% increased in the customer rate. New business is coming in at, close to 8-10% above and that is also because the change in mix up business we are doing a lot of consulting. So I think revenue increase is one. Second is like most company we are watching costs very carefully. We have postponed some recruitment of senior people overseas. So, I think the margin levers will be primarily revenue increase because of higher realization from customers and some cost reduction that we are planning both in terms of travel and seminars and sponsorships.
Adil: Okay sir thank you very much.
Moderator: Thank you very much sir. Next in line we have Mr. Nimesh from Man Financial.
Nimesh: My question is on your clients, your key clients, can you throw some light on how your clients have, you know, been able to ramp up their business. Second one, I heard that home depot is going through some slowdown due to sub-prime mortgage landing market going down. Can you throw some light, is it affecting you in your business?
Ganesh: Our largest client Cisco, nearly about 19% of our revenue, is growing extremely well. Like last year we did about $30 million with Cisco, this year the goal is to do $40 million as of last month we already crossed $3.1 million. So I think that is going extremely well. If you look at Marks & Spencer, we have grown from $1 1.8 million in terms of Q4 of last year to $2.1 million in this quarter. National Grid which was slow last year, is expected to do much more this year. In fact in Cisco we actually got a fairly large contract which was being signed by one of the global multinationals which has terminated and have been positive reinforced to us which is an endorsement of the faith in us. Home Depot as we mentioned is actually a company we signed as a three-way agreement through a minority owned company in the US, which has taken on the onsite part of contract and we doing offshore. In that we are doing very well. We ramped up during the quarter and we expect that for the same model we will probably be also getting four more accounts. I think in summary except for Fujitsu, which is bit static since shareholding sale. Right now, however, we are in discussion with Fujitsu as some of you may be aware Fujitsu’s strategy is to see whether they also do some acquisitions in India. At this point of time I think that is not really happening very much. The application development, application supporting work are growing consistently. I think overall, all our major customers are doing well and there are lots of new ERP customers. As I mentioned, somewhere we are now hitting off the FTO (First Time Offshorers) segment. We had a lot of good FTO clients during the last year, like the Assurant group in the US, Mylan Pharmaceuticals again from the US, a fairly large retail chain which is really looking for off-shoring for the first time from UK. We are expecting that for at least 10 new customers to be added, who will be first time offshore and out of this at least 8 will become more than a million dollars in this quarter so, I think overall customer acquisition as well as customer retention has been very good.
Moderator: Mr. Nimesh do you have any further questions? Thank you very much sir. Next in line Mr. Vijay from Amber Research.
Vijay: Good afternoon, I just wanted to know, what is the attrition percentage?
Ganesh: The attrition percentage is still quite low. Of course we have just given our increment letters this week. I do not know what happened to the increment letter. At hiring segment, I think we continued to maintain managerial attrition as close to 5%, which is very low.
Vijay: Okay on the quarter-on-quarter budgets it is on the same level?
Ganesh: It is in the same level and if you look at both the junior level programmer attrition that is still less than 20% similarly call center is about 22%. The rest of the BPO continues to be even lower then the programmer attrition and that is about 16%. I think overall it managed very well and we have very strong HR team, which is doing a lot of work to maintain both the retention and the motivation.
Vijay: Okay, one more point. On the bench part you said that you had Rs. 1.35 crores invested. So, what are the bench strengths at that time, when the customer converted from the business order?
Ganesh: The bench strength what I mentioned was about 96. One was because of this Marks & Spencer conversion of their business model and second is because of this project coming to an end and right now we have both 20 people still being deployed and the rest are being deployed in other parts.
Vijay: Sorry, I missed the first part on the revenue growth a volume of 20%.
Ganesh: Revenue growth, if you look at ERP business, the oracle business grew at 39% volume and SAP at 77% volume which translated because of the lower Rupee to 26% and 27% respectively. The ITS business grew by 60%. The problem has been in the application portfolio management business where the volume growth is 20%, but the value growth is only 8% because all the revenues are in based on dollar and pound, but also some accounts got transferred to the ITS business and strictly comparative volume growth was 31% and value growth 17%.
Moderator: Thank you very much sir. Next in line Mr. Gaurav from Share Khan.
Gaurav: Hello, how much were the increments that were given.
Ganesh: Roughly, 60% of the people who were eligible, the average is about 14%.
Gaurav: Okay 14% for the entire staff?
Ganesh: But, again remember there is only 60% were eligible because the rest are….
Gaurav: What about the rest sir?
Ganesh: They joined the last year and they have not yet completed a year.
Gaurav: The wage hike will be effective from?
Ganesh: It is actually the letter which has been given from the effective July?
Gaurav: Okay, you will get the effect of this in quarter 2?
Ganesh: Whatever impact wage hike will start in quarter two.
Gaurav: The fresher intake in quarter one was how much?
Ganesh: In quarter one we added about 390 people and many obviously 70% of them are in the applications support business.
Gaurav: Fresher’s you are talking about.
Ganesh: All the trainees come in at this point of time allocated to various business units.
Gaurav: Okay, the total intake is around 270 odd people?
Ganesh: We have one batch of people who are coming in January as a first batch comes now, overall this year.
Gaurav: How much was the intake in quarter one alone?
Gaurav: I am sorry I did not get you?
Ganesh: Total during the year, expect to net add about 700 people.
Gaurav: This with fresher added in quarter one was how much?
Ganesh: This quarter it is 250.
Gaurav: 250 was the fresher’s added right?
Ganesh: I do not understand your question can you repeat that.
Gaurav: I just wanted the numbers of the fresher’s added in this in quarter one alone?
Ganesh: See, this quarter the total addition is 267 people right, nearly 200 are fresher. In the whole year, we probably expect to add about 150 freshers, about 300 to 350 lateral hire - that is our model.
Gaurav: Okay great. Your marketing staff has been declining if you see, this in quarter end quarter, from the past two quarters, why that?
Ganesh: The marketing staff has not been declining, we actually got rid of a couple. We have stringent norms for measuring marketing staff in the sense that they have to perform within two quarters otherwise we replace them.
Gaurav: Okay, there have not been these things replaced, because they are like you know this thing dropped from 80 to 70?
Ganesh: One of the reasons is that we are consolidating marketing staff in India which is part of the team. Overseas has reduced four people in the east coast.
Gaurav: Sir, you have plans on your salary hikes and this thing is likely to be effective in this quarter, so you will have some pressure in quarter two also, so this thing for the year I believe you might have some decline in the operating margins, when this compared to the thing in last year, I mean what kind of fall you are expecting or what kind of fall you see there?
Ganesh: We do not see any fall over the entire year for the simple reason that I think we would see increased rates in both existing customers and new customers and I think that would more than compensate the salary.
Moderator: Sure sir, Sir next we have Mr. Nitin from ICICI direct.
Nitin: Yes hi. Thought Digital by when would it start being EBITDA positive and what was the plan?
Ganesh: In the third quarter, the EBITDA would become positive.
Nitin: Already the basic work you said is over.
Ganesh: Yes third quarter definitely will be EBITDA positive. By fourth quarter, we are assuming it will make EBITDA of close to a million, I mean to about 800 million. Basic goals for the whole year is to do about 22 million revenue for 1.2 million that is the goal for Thought Digital this year then to bring it to a stage where it will be higher EBITDA than the overall ZenSar which is the whole purpose of the acquisition.
Nitin: And going forward let us say keeping in the mind you know the appreciating Rupee and the overall idea that assuming that it would continue to go strong going forward what is the long term strategy that you are in place, what are you really thinking?
Ganesh: Yes let me just explain very quickly, because there are two things one is of course we will continue to focus on these three areas which are the core business which focuses on Fortune 500 volume growth, the second business which ERP which is the integrated ZenSarThoughtDigital plus the SAP business, third is this whole segment called Innovative Technologies which focuses on product engineering services, partly on embedded systems, partly positive vertical over the next year or so and in the multimedia gaming and learning segment. I think these are the three horizontal focus areas that we will continue. Focus we maintained it as retail, manufacturing, and financial services and added media to that space. My expectation is that retail will as well in the retail segment we have three new contract signed over the last one month and we are becoming a key player at Oracle retail. The retail will continue to be a core vertical focus along I think we will find more and more work happening in retail, more and more work happening in the provisional model that we are adopting that is again is the solution. ZenSar positioning is greedy to lead an innovation on some few verticals and make it out.
Nitin: So in terms of let us say there was this talk on the new acquisition somewhere in Europe now what are we really looking for in that acquisition?
Ganesh: Exactly as we got an over hike in my opinion but it is the tactical acquisition that all acquisition 30 people, if you look at Europe strategy now we have focus on Poland as well as Germany.
Nitin: So the idea is to increase focus on Europe and take our portfolio there basically.
Ganesh: Poland and Finland and we have got the go ahead to open branches in Brazil as well as in Amsterdam. Then we are going to acquire a company a small company probably 25 to 30 people, of about $4 to $5 million revenue and acquire it either in Germany or Switzerland.
Nitin: But the cost of manpower in Poland is significantly lower than in other places is it?
Ganesh: Man power is about somewhat higher than India, but the advantage we are getting is a lot of subsidies from the government, they are getting incentives for recruiting Polish national as well as sending them to India for training. Effective cost for us at this point of time is over the next one year will be about 20% lower than doing work in India, okay so that is about it, that is the advantage of proximity and assure and German and Finish speaking.
Nitin: Right fine thanks a lot.
Moderator: Thank you very much sir. Next line we have Mr. Atul from TATA Mutual Funds.
Atul: Hello sir considering your PBT guidance of Rs.100 crore for FY2008 you made around 17 crore in first quarter so for the next three quarters you will require on an average 27 crores so what are the things that make you so confident about?
Ganesh: See we I mean just to work backwards somewhere, given the rate of the business and the kind of customers that we have doing up to a 35 crore PBT in the last quarter should not be a problem so if we work backward from there and as you said now you have already done these two together will be 55 so the average is about 20 to 25 crores between quarter two and quarter three that is really the optimism and assumption that we have the order book and given the kind of profit basic currently we have.
Moderator: Thank you very much sir. Hello Mr. Akshay Shah, sir you are next in line.
Akshay Shah: Good evening sir.
Ganesh: Good evening.
Akshay Shah: Congratulations for good set of numbers despite challenges. My question is that you have press release you mentioned about uncertainty in your tax front can you give what kind of uncertainty is this and how we are going to affect it.
Ganesh: There are two or three things, one is of course we have just seen the impact of minimum alternate tax etc that is one. Second is I mean more internal because as I said we have acquired a company in US and obviously that is entirely American and we have to see how quickly we can offshore, more the offshore, less the tax implication. Right now we have fairly large as you would have seen in our numbers. Our onsite revenues are almost 67% partly because many of our customers are also doing more work onsite as well as due to the Thought Digital acquisition and the EZA acquisition in Japan. We are trying to how quickly we can move to offshore. Tax will work out to anywhere between 15 to 24%.
Akshay Shah: So in the first quarter it has come out to about 21% so far can we assume for the full year and safely about 20%.
Ganesh: Not really I think it safely should be lower than that but 20% will be in safer position.
Akshay Shah: As the offshoring will increase from Thought Digital, the lower tax liability should go down.
Ganesh: Yes that is the idea and including both thought digital and EZA and also many of the projects that was now happening onsite.
Akshay Shah: Sir tell me about the ITS what was the EBITDA in ITS because you said it is profitable now, so can you just tell me that any chance of ITS going back into the red notch?
Ganesh: ITS EBITDA was about 3% during this quarter and goal for the whole year is to move it up to 7% so it only go up because there is some accounts that has been transferred.
Moderator: Thank you very much sir. Next in line is Mr. Farooq Daruwala from Arm Research.
Farooq: Hello sir I wanted to know more about the acquisition strategy that you follow and with more focus on the recent this thing in Japan you have started EZA with more focus on what we are doing with EZA and what is the future profit of the company, had it is having tie up or you know kind of relationship with EZA and what are those future acquisitions you are looking at and what actually does the company look in acquisition, is it like a kind of a synergy that we are trying to extract or some diversifications that we are looking for?
Ganesh: Very good question, I just give you a quick snap short of our strategy. We look at three segments, one is the traditional fortune 500, fortune 1000 outsourcing like Cisco, National Grid, Marks & Spencer, Credit Suisse with all clients apart and then what we are trying to do provide is a full spectrum of services which is right from application support and development testing to BPO services which is what is very successful for us. The second part of our strategy is ERP business as you will be aware we recently bought this company Thought Digital and it has become one of the top 10 Oracle providers worldwide not just implementation, but also offshore supporting sector. OBT we acquired two years back and that is doing very well as I mentioned 77% growth year on year and quarter and plus you add some new organic services like business intelligence, data warehousing then we have a third business which is the ITS business innovative technologies, so that focus is primarily on doing multi-shore work, we just finished a very successful project with the Narcotics Control Board of the Government of Thailand which was done partly in Japan, partly in Thailand and partly in India and we now booking a number of projects which require dual shore or even triple shores work , it is starting an assignment in UK, but the analysis will be done in UK, the design will be done in Poland, and the development and testing in India. So this whole model is kind of coming to be very useful for us. We also has to work with embedded systems companies, product engineering companies and fourth vertical we are starting is the whole media entertainment gaming industry, so EZA for instance is primarily a company that is very good at converting, they have software which converts video technology to mobile so lot of work they doing in that area and we now looking at in fact hired a couple of very senior people with creative skills and that is the focus area for us in terms of animation, games, multimedia outsourcing which will probably get started with in this quarter and we build it over the next two months . So is this the answer to your question. Strategy is based on three or four types of customers and the acquisition SAP was strengthen the ERP segment, in that position Thought Digital acquisition probably was strengthening the Oracle segment. EZA was primarily to get a foot hold into the Japanese market for advanced technologies and that has spread into I think we probably start marketing that in Europe as well that we build a full fledged advanced technology in multimedia segment. So I think that are the acquisition strategy as far as the only acquisition we are planning this year is going to be in the Germanic region which is going to be either in Germany or Switzerland and that is primarily to get a foothold geographically into that market which is language market so that is the broad strategy.
Farooq: Sir I had one more question, are we looking for any acquisition with India may be?
Ganesh: No not at all because I think we have completely end-to-end capabilities in terms of delivery, unless there is a real reason for any particular project that is why we are not looking at any India acquisition at all.
Farooq: And sir you have an extensive strategy for Europe I mean any may be you have some strategy for Asia Pacific coming into Middle East or something like that?
Ganesh: We are actually doing extremely well I will just give you a little background. Three years back, 7% of our revenue came from Asia pack, last year was 22% so all the chosen markets we have three regions one is what we called in Singapore and China we are doing extremely well in fact the growth is almost 40% year-on-year. Then if you look at the Australia-Japan segment, Australia has been successful start to make in two years back, Japan is now scaling especially with EZA and the third segment is what we called IMEA which is India, Middle East, and Africa and we have got three very large contracts in fact amounting I mean over 5 million dollars in the Middle East recently, India also we doing work now such that started 18 months back and South Africa is a very strong segment for us, we are doing work with 4 to 5, large financial institutions there doing work for product companies. So I think all these three regions which we have in Asia pack and Africa doing well. I think that is very critical to our strategy and as you rightly pointed out in Europe also we hope that across these three regions in Eastern Europe plus Nordic on one hand then UK plus Benelux as well as the Germany Switzerland area I think we would have a kind of planted our seat in all these areas, UK we have done it very strong and take in take to us full regional strategy for us in the next year.
Farooq: What about US?
Ganesh: We started off being a west coast company and today we are doing work not only on west coast, but also in Dallas, Chicago with the acquisition of Thought Digital I think we have a much stronger presence on east coast. So again I think we have a coast-to-coast capability in the US by end of this year.
Farooq: And sir can you give me a brief preview of which companies are the competitors of yours working in same segment and may be you know you got to have to some strategy to do you know may be have to suffer staying back to these competitors going to effect their business or something like that?
Ganesh: See in the core APM business obviously our competitors are everybody ranging from Accenture and IBM, Infosys and TCS. We do not normally run into other big size companies, but occasionally in Asia Pacific and Europe, it could be MindTree and Hexaware. In ERP segment we are competing primarily against Satyam, Wipro, and Infosys to certain extent and people like Bearing Point which is really the KPMG offshore. The ITS business I think we are really competing with traditional players who would operate traditional solutions vis-à-vis our innovative solutions and in the new business we are talking about is the media area that of course there are less competitors but you know very niche competitors both in local market and overseas also. So I think these are the four segments with different competitors and I think we have good strategies in terms of innovation as well as quality, which helps us to overcome competition.
Farooq: Thank you sir.
Moderator: Thank you very much sir. Participants are requested to restrict to one question in the initial round. So next line Mr. Atul from Tata Mutual Fund.
Atul: Hello sir, can you throw some light on the restructuring cost that you incurred on Thought Digital in this quarter and so the guidance for the Thought Digital for this year?
Ganesh: Yes if you look at this quarter we have really put a team of four people in New York and also have one offshore person here who is really supporting the transition of offshore. So in terms of total cost for the quarter, I think we would have invested close to I think in this quarter about Rs.1.5 crores is the total restructuring investment that we have made in terms of positioning people there itself.
Atul: Do you expect such restructuring cost again in second quarter or third quarter?
Ganesh: At the end of second quarter may be one person there as a kind of continuity person, but and then that is as I said our whole goal is by fourth quarter to have close to $7 to $7.5 million revenue coming from Thought Digital and close to a million and that is what steady track for may be achieving that. Next year our goal is to do closer to $32 million revenues and close to $4 million EBITDA there, that is actually our overall gain plan to this acquisition.
Atul: Sir one more question the original team of Thought Digital is in place or is there need acquisition?
Ganesh: Too much impact in fact what you have done is I mean about at the lower level is about 15 to 16 people we trying to replace who are the whole timers, but the original founding member team which is really five people are very much there are they are working under the direction of Sushma who is the chief strategy officer. So Sushma is the acting CEO Thought Digital and these five partners are now playing different roles rather than as one team and one handling delivery, one handling large accounts, and three are handling sales and that is actually how we are restructured.
Atul: Thank you sir.
Moderator: Thank you very much sir. Sir next here is Mr. Vinay from Credit Suisse.
Sunil: Hello.
Ganesh: Yes I can here you.
Sunil: I am Sunil I just have one question. Basically your fixed bed as the question is on revenue in fact come down, is it a conscious effort or was it any thing related with the Marks & Spencer contract?
Ganesh: No it is really because if you look at the onsite percentage that climb to almost 67% that is nothing to do I mean it is really okay because if you look at Thought Digital I would not say time and material still projects but it is delivered onsite because of the model so I think that is why you are seeing it, otherwise there is no conscious strategy. In fact our very conscious strategy in ITES is to move towards fix bid. so that is why we can deploy our solution to much more effectively. So I think these hedging will push us more offshoring and more fix bid.
Sunil: Sir also can you regarding your utilization can you see higher level to be sustained because we have seen some of the bigger results that came out this week and last week the people had increased utilization as a measure for cost cutting so do you want to worry thoughts on that?
Ganesh: Yes actually I mean the one immediate reaction we could have had was to say that look all the new hires which we are doing in terms of engineers and trainees, we could have to cut back on, but that would be betterment for the growth of the business because the volume growth is still very good, so utilization as designed in the first quarter is always low because that is when we get nearly 250-260 people. So I think utilization always for us speaks towards the third and fourth quarters which will continue that, so we will of course be a little careful in terms of natural hires and we are trying to push younger engineers into building faster that we would normally do and that is part of our kind of response to the whole cost pressure that we are facing. But utilization is not the highest at this quarter, but it will improve next quarter and will optimize in the third quarter, which is a normal pattern.
Sunil: Sir and also just to understand your hiring pattern, which is the quarters in which normally more of the freshers come and join?
Ganesh: I think it is really the first quarter you have already seen fair amount of freshers, we will also have some more freshers this quarter and then it will move into utilization in the second quarter.
Speaker: It will be in June that is when the training starts effectively the payroll raise in the second quarter.
Sunil: Okay. Thank you very much.
Moderator: Thank you very much sir. Next we have Mr. Dipen Mehta from Dipen Mehta Stock.
Dipen: Just wanted to understand I have got disconnected several times as the Thought Digital revenues are included in the results this time am I correct?
Ganesh: Yes of course.
Dipen: So what is the revenue in the Q1 for Thought Digital?
Ganesh: You want this financial Q1 April to June?
Dipen: Yes this June quarter how much was the revenue?
Ganesh: 19.35 crores and very marginal profit.
Dipen: Okay that means excluding Thought Digital we had degrowth quarter-on-quarter.
Ganesh: In terms of revenue?
Dipen: Yes.
Ganesh: Is the organic growth.
Dipen: Quarter-on-quarter is it degrowth?
Ganesh: Quarter-on-quarter I do not know.
Dipen: From 17.
Ganesh: Yes it probably be a small degrowth because I mean you are right because two projects I mean Marks and Spencer as well as a large testing assignment that also came out again you are probably right.
Dipen: And also I mean I thought you would have repeat yourself, but I do not understand what happened in this quarter I mean because the way off normally we have got used to ZenSar delivering decent at least Q-O-Q your performance and suddenly we have this quarter with 26% drop in Q-O-Q it is surprising and I think whatever was there in the press release it did not explain this sharp drop in the operating profit and the bottom line.
Ganesh: As I mentioned earlier see there are two or three, one is of course there was some I mean last quarter was an exceptionally good quarter and compared to that this quarter as I mentioned earlier we got affected to the extent of Rs.2.8 crores by the Rupee and then there is a bench created by the closure of this project of Rs.1.4 crores thus we taken on the trainers I mean training which is almost additionally 200 trainees which happened in the first quarter which is contributed about Rs.96 lakhs and then there is an overall increase in affect partly due to the restructuring cost and partly due to what we are doing in adding manpower to about Rs.1.6 crores. So thus you are seeing the difference in an exceptionally good fourth quarter and normal first quarter and of course further affected by the Rupee. So, we are not particularly alarmed by this because it is a conscious investment we do in the first quarter every year and given the visibility of customers as well as revenue growth not too concerned about it.
Dipen: So Rs.2.8 crores is the total hit and Rs. 1.4 is on account of bench?
Ganesh: Additional trainees are recruited about Rs.1 crore and Rs.1.6 crore is on account of OPEX out of which 50% is on account of what we have invested in the Thought Digital research.
Dipen: But we did have Rs.1.75 crore write back in other income on account of that is the credit on the credit side.
Ganesh: The overall the four items we are looking on is just on operating EBITDA and then of course we have some mitigating factors like you know write back of options.
Dipen: This year you had a given a guidance of about 55% topline growth are you still picking by that kind of guidance or.
Ganesh: We are still looking at Rs.850 crores as revenue and we looking at Rs.100 crores as profit before tax, Rs.100 crores as a stretch of course, but at this point of time given the customer profit we still believe we can do it.
Dipen: And what?
Ganesh: Profit before tax for the simple reason that tax will vary depend on how quickly we can offshore some of these onside projects including Thought Digital during this financial year.
Dipen: But that is this Rs.850 crore revenue and Rs.100 crore PBT is based on Rs. 40 to dollar and presently whatever you are or are you expecting?
Ganesh: Based on Rs. 41 per dollar, yes we are assuming an average of 41 during this.
Dipen: 41 and if it goes then we have to again revise this thing over it?
Ganesh: Yes I am assuming that 41 will stabilize that is our expectation that even if that goes further it probably go down each financial year, but 41 is what we are basing on.
Dipen: And this time what you have hedged?
Ganesh: We have hedged hopefully we are going to mitigating it.
Dipen: We have got 50% of revenues from US so does that mean that 50% is dollar or what will be dollar-based revenue.
S. Balasubramaniam: Yes you are right.
Dipen: 50% is the dollar revenue and what will you are doing in Asia Pac and Japan, and Australia is all in local currency.
S. Balasubramaniam: That is right in local currency.
Dipen: Thank you I have some more questions I will reserve them for later.
Moderator: Thank you very much sir. Next we have Naushil Shah from Anand Rathi securities.
Naushil: Good afternoon sir. Hello.
Ganesh: Yes go ahead.
Naushil: Good afternoon sir, could you give me a segmental breakup in dollar terms for this quarter and the last quarter.
S. Balasubramaniam: You can just send a E-mail to me and I will send it to you, my e-mail ID is suby@zensar.com.
Naushil: Okay.
Moderator: Thank you very much sir. Next we have Mr. Achal Shah from Quest Investment.
Achal Shah: Sir just one clarification, hello. You said that except for the US all other revenues are in the local currencies, am I right?
S. Balasubramaniam: Yes.
Achal Shah: Okay so how do you see in the next two years our US revenues spanning out basically which was I think probably in first quarter it was something like 49% or something I suppose, yes 49%.
Ganesh: We do not expect that in fact this Thought Digital acquisition I would expect that US would go up to about 55%, so our ideal mix would be 55% in US and 25% in Europe, and 20% in Asia Pacific that is what we are moving towards and depending on acquisitions that varies from quarter-to-quarter and half year-to-half year.
Achal Shah: Okay what I am talking is about yearly terms over next two years how do you see the things panning out?
Ganesh: We move from 50 to 55% in US and see what we do in Asia Pac and Africa is about 25% and Asia Pac is 25%.
Achal Shah: Okay thanks.
Moderator: Thank you very much sir. Participants who wish to ask questions please press *1. Next in line we have Mr. Dipen Mehta from Dipen Mehta Stock.
Dipen: Hello, sir you know I am observing that the contribution from the top client and the top 10 clients also have come down and I also heard you say that two projects of Cisco and another UK-based company is this thing have got overseas so if you can just tell us exactly what has happened on that front with the larger clients of the company?
Ganesh: Larger clients still continue to grow as I was mentioning earlier Cisco is doing extremely well and the project that came to an end was on Marks & Spencer because they actually engaged us to build a full international franchising ERP system. Another party that finished naturally was a large testing project we are doing in Holland for this port called Euromax, but apart from that if you take the top 10 customers they continued to do well very stable and good revenue and that segment is very much under control and as I said as we grow the ERP segment is going to do extremely well and start pumping in business to first time offshore implant which is the current focus area, I think we have a good balance of both large customers, ERP customers, and first time customers, that is the idea.
Dipen: Thank you.
Moderator: Thank you very much sir. Next we have Mr. Adil Shah from SSC Mehta.
Adil: Hello sir, sir actually can you repeat the figures how much you got from third digital in this quarter.
S. Balasubramaniam: Rs.19.35 crores.
Adil: What about in the last quarter any idea?
S. Balasubramaniam: Last quarter was about USD 1 million roughly about Rs.87 lakhs.
Adil: And sir the wage hike in fact is going to come in the second quarter not in the first quarter right.
S. Balasubramaniam: Wage increase will come from Q2.
Adil: So there was no impact of the wage hike in the first quarter?
S. Balasubramaniam: That is right.
Adil: Okay sir thank you very much.
Moderator: Thank you very much sir. So next in line Mr. Deepak from Prodigy Investment.
Deepak: Hello good afternoon sir, I just wanted to have a feel that how many clients you had before the quarter basically according you said you have 24 clients.
Ganesh: 24 new clients, we totally working with about 200 and odd clients and out of which roughly about 40 to 45 are clients we work with for a long time and the rest are either project or one of clients will be we got this quarter.
Deepak: Okay and sir what should be the FY2008 revenue for Thought Digital that we should be looking around?
Ganesh: We are looking at 22 million as the total revenue for this year and over a million dollar EBITDA.
Deepak: Okay thank you very much sir.
Moderator: Thank you very much sir. Participants who wish to ask questions please press *1. Sir we have a followup question from Mr. Deepak from Prodigy Investment.
Deepak: Sorry to bother you again. Sir I wanted to have a bit detail information if you could speak something on the media business that you are starting on?
Ganesh: It is not due to, let me just explain what we do because there are two or three segments we are looking at. One is as I mentioned the whole content business that is lot of work happening in the mobile content business that is one, the second is related to that is internet-based learning and there is again in various content areas again where we building content for learning programs etc. Third area is called usability because as more and more stock moves on to the bed especially with web 2.0 etc the impact level for audience has been very, very high, so we have a small usability team that we build up that may be doing this work on impactiviti and usability. The fourth area is animation so there is a couple of contracts that we have currently negotiating. There is some character animation a more of graphics etc could need to be done. So this is something we probably see as a small center we set up over the next 2 or 3 months. We already have 2 large prospects who are interested in doing business there and depending on how it came we look at the full fledged vertical probably by next financial year.
Deepak: Okay thank you.
Moderator: Thank you very much sir. Participants who wish to ask questions please press *1. Sir next in line we have Mr. Adil Shah from SSC Mehta.,
Adil: Sorry to come again. Sir what was the reason for slowdown in the APM business?
Ganesh: Indian business.
Adil: APM.
Ganesh: APM business, as I mentioned I mean one of the reasons that you have seen because of two projects that got stalled, but otherwise there is no real slowdown. It is only in this quarter we are finding that some accounts to be transferred that almost 8% of what you have seen the slowdown is been accounts that were handled in Asia Pacific by the APM business unit which has been more to idea. It is really cosmetic, if you look at APM plus ITS you will find a reasonable growth is always, of course the star performer has been enterprise application, which is the star performer for the last 4 to 5 quarters.
Adil: Thank you very much sir.
Ganesh: And there is impact of 10% on currency.
Adil: Okay thank you very much.
Moderator: Thank you very much sir. At this moment there are no further questions from the participants. I would like to handover the floor back to Mr. Viju George for the final remarks.
Viju George: Thank you all for participating in the call. I will also like to thank the management team from ZenSar for giving us the opportunity to host this call. With that I turn over the call to Dr. Ganesh Natarajan for the final remarks.
Ganesh: Thanks very much and thanks for all of you for joining and staying on this call. There is a very quick summary as I said being a tough quarter as for all the reasons that I have already mentioned, but good news is the business itself is very healthy and all the segments you are looking at and the new segment is looking very, very positive So,I have really no doubts that it will continue to be another very good year for ZenSar. Especially during the second half we will have a lot of attraction that we currently getting from customers continue to grow the revenues and profits, so as the management team we are confident and I think we will make it up. Thank you.
Moderator: Ladies and gentlemen thank you for choosing WebEx conferencing service. That concludes this conference call. Thank you for your participation. You may now discontinue the line. Thank you and have a nice day.
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