Intelligroup Q2 2009 Earnings Transcript

Intelligroup, Inc. (ITIG)

Q2 2009 Earnings Call

July 30, 2009 10:00 AM ET

Executives

Norberto Aja - Jaffoni & Collins, Inc.

Vikram Gulati - Chief Executive Officer and President

Alok Bajpai - Chief Financial Officer

Analysts

James Friedman - Susquehanna Financial Group

Presentation

Operator

Ladies and gentlemen thank you for standing by and welcome to the Intelligroup Q2 2009 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Thursday, July 30th, 2009.

I would now like to turn the conference over to Norberto Aja. Please go ahead, sir.

Norberto Aja

Thank you operator and thank you everyone for joining us today to review our 2009 second quarter results. In a moment, Vikram Gulati, President and CEO, and Alok Bajpai, CFO of Intelligroup will review the quarter and then we will open the call to questions.

Before we get started however, I would like to remind everyone of the Safe Harbor statements included in the press release and of the precautionary statements supplied to today's conference call as well.

During the course of the call, the company may make forward-looking statements that reflect management's current expectations regarding future performance or events including those related to market demand or services, strategic partnerships, future share repurchases and future sales. Although management believes that the expectations reflected in such statements are reasonable, they give no assurance that such expectations will prove to be correct. And you should you be aware that the actual results could differ materially from those that are contained in the forward-looking statements.

Forward-looking statements are subject to a number of risks and uncertainties including but not limited to the continuation of the current global economic crisis or further deterioration of the global economy, variability of quarterly operating results, continued projects, concentration of revenue, ability to attract and retain professional staff. Dependence on key personnel, there is projected associated risk including termination or short notice, substantial competition, volatility in quarterly operating results caused by fluctuations in the currency markets and risk associated with intellectual property rights, risk associated with international operations and other risks detailed from time-to-time in the company's filling with the SEC, including the company's Form 10-K for the fiscal year ended December 31, 2008.

The company's forecasts are dynamic and subject to change. Therefore this forecast speaks only as of the date of this conference call and webcast today July 30, 2009. The company assumes no obligation to update information contained in today's call.

With that, I would now like to turn the call over to Vikram Gulati, CEO and President of Intelligroup. Vikram?

Vikram Gulati

Thank you Norberto and good morning to everyone in the U.S., and good evening to those calling in from Asia.

I will spend a few minutes discussing our business and the major drivers behind the quarter's results and the near-term prospects for the company. Afterwards, Alok Bajpai, our CFO will discuss the quarter's financial results in greater depth.

Despite the continuation of a very challenging business environment, the team at Intelligroup was able to maintain Q2 revenues in line with the levels at Q1 of '09. Though the business environment continues to be challenging in Q2, we are seeing some encouraging signs in the overall IT services sector including a greater degree of receptiveness from many of our customers and prospects to discuss new or expanded initiatives.

As we discussed last quarter, during this challenging economic period, our management has focused its emphasis on what we are able to control, mainly improvements in operational and financial performances. It is in those areas where we have been able to make significant progress in the first half of the year. Our second quarter performance benefited from our actions during the period as well as from measures taken during the prior months.

The stabilization of revenues together with the disciplined management of our cost structure enabled us to expand operating margin and free cash flow. With net income of 3.2 million and an EPS of $0.08, this quarter's results substantially exceeded those of the period year ago.

With regards to the market, we continue to focus on the same verticals and the same service lines where we have developed specific expertise. Our life sciences along with energy and high-tech verticals achieved revenue gain versus Q1 of '09, while the consumer products and manufacturing sectors continue to exhibit challenged demand on a sequential basis.

The U.S. continued to be our main source of revenue accounting for about 75% of the billing, while Europe revenue grew to 17% from approximately 14% in the prior quarter. Revenues from both India, Middle East and Japan remained relatively flat.

As has been the case in the past, SAP-based work represented the bulk of our revenue amounting to approximately 70%. Oracle-based work represented an additional 15% of revenue. Though not yet a significant portion of the business, E-Business and IMS or Infrastructure Management Services, both continued to show growth with each representing now about 6% of total sales.

In terms of our operations as I mentioned, our team remains very focused on cost management utilization and margins and turned in a very strong performance. A clear illustration of that is seen in our continued improvement in gross margins as well as cost optimization in the SG&A line.

Our utilization rate, a key driver of margins is now at 78%, up from 72% in Q1 of '09. We aim to maintain utilization rates within this band or within this level for the remainder of the year.

Another key driver in our business is pricing. Pricing has been moderately undercut on levels in the second half of '08 and is reflected in the modest decline in both our offshore and onsite billing rates. While the environment remains very competitive and in many deals we have seen significant competition, we are pleased that our customers are recognizing the value-add that we provide and are allowing that to be reflected in our contract terms.

In terms of financial health and liquidity, we are very comfortable with our current position. Our balance sheet continues to improve with the June 30, '09 cash, cash equivalents and short-term investments increasing by 4.4 million, to 20.3 million compared to March 31, 2009.

As did most companies, we continually evaluate strategic options and consider options to invest a portion of our cash into organic or inorganic growth opportunities. As of date, we have not taken any concrete steps towards any specific strategic option.

Recent reports in the Indian press that we have earmarked approximately $18 million to fund acquisitions are not accurate. As is typical of most public companies, we do not amend on strategic discussions unless and until we have a definitive agreement in place.

We also feel very comfortable in our ability to finance our business as we continue to generate healthy cash flow from operating activities, which was approximately 10.6 million for the first half of this year.

We are particularly honored to have been acknowledged over the past several months with several awards for the quality of our work and for the high level of customer service we bring to our clients. In particular, we are most proud of the 2009 SAP Pinnacle Award in the category of top-company contributor, SAP Developer Network Community granted to the leading SAP partner that has excelled in enhancing the customer experience, addressing critical issues such as accelerating co-innovation and improving return on investment.

Another recognition of our outstanding work is our continued inclusion by Gartner in the ERP Service Provider, North America Magic Quadrant report. We have a deep knowledge and expertise around ERP solutions and support services. So we view our positioning in the Magic Quadrant as a reaffirmation of this.

In summary, the market conditions were clearly difficult in this quarter. But we successfully offset most of the impact by focusing on factors within our control. I am very pleased with the way we are responding to the environment. And in my mind, we are a stronger company now than we were a year ago.

Most importantly, we are committed to extending the operating discipline that we have developed during these challenging times to our business when the market environment returned to much more healthier period.

With that, I would now like to turn over the call to our CFO, Alok Bajpai who will review our financials for the quarter end and the year. Alok?

Alok Bajpai

Thank you, Vikram and many thanks to all of you for participating today. I will review some of the key financial line items and drivers behind each, after which I will offer some thoughts on our performance in Q2.

Let me begin by saying that I'm very proud of the way our company has faced the challenges of the economic environment. Our utilization and operating margin are just two measures that show how closely we are managing our business on behalf of our company and our shareholders. We are positioning ourselves in important ways for future growth and improved profitability. Be it growth in leadership, growth within our verticals or geographies and growth in revenues and profits, we have a laser focus on all these issues.

Now let's review the quarter results. Revenues for the second quarter remained relatively flat at $31 million, as compared to Q1 '09, though it decreased 22.7% versus $40.1 million during the second quarter of 2008.

Building on what we said in last quarter, the headwinds we have been facing on revenues are primarily the result of clients exercising added caution by either slowing the pace of ongoing projects or deferring the initiatives on new project. Overall we are relieved that there seems to be some signs that the demand for IT services had stopped its downward trend and has shown signs of stabilization.

Moving on to income statement, margins continued to expand as a result of our focused commitment to improve operational efficiency. Gross margins rose 200 basis points to 34.5% compared to 32.5 for the same period last year and 31.2% in Q1 of '09. Operating margins rose to 9.3% compared to 6.5% in Q2 '08, and 5.9% of Q1 '09. These improvements are solely the result of focused effort and improving productivity and managing our bench effectively; disciplines, which are critical to our long-term success.

SG&A, including depreciation and amortization, decreased by 25% to 7.8 million, compared to 10.4 million in Q2 of '08, while remaining flat compared to Q1 of '09. Q2 operating income was 2.9 million or 9.3% of revenue, a 280-basis point improvement over 2.6 million or 6.5% of revenues in Q2 '08, and 340-basis point improvement compared to operating income of 1.8 million or 5.9% of revenues in Q1 of '09.

Turning for a moment to some key operational matrices. Our utilization continued its upward trend improving by 600 basis points sequentially to 78%, a significant improvement from the 73% during the same period of last year and 72% of Q1 '09. The worldwide headcount stood at 1,948 as at the end of quarter.

With regard to billing rates, average onsite bill rates held rather steady at $105, both as compared to the second quarter of '08, and sequentially. Average offshore rates declined to $21 as compared to $23 in the year-ago period and declined marginally sequentially. Though the pricing environment in general continued to be even more severe than these figures suggest, in most cases Intelligroup was able to demonstrate it's value-add and competitive advantage in order to mitigate client pressures for price reduction.

Our onsite-offshore revenue mix has been relatively flat for the past three quarters and compares favorably from that of 70-30 in the year-ago period. Moving on to the foreign exchange, we were able to reverse some of the mark-to-market losses of the past quarters.

ForEx gains for this quarter were 700,000 reflecting the strengthening of the Indian rupee versus the U.S. dollar as compared to previous quarter. This compares to a net foreign exchange loss of 1.4 million in Q2 '08 and a net foreign exchange loss of 600,000 in Q1 of '09. Tax expense increased to 600,000 in Q2 '09 in line with increasing profitability, as compared to 300,000 in Q2 '08, and 500,000 in Q1 of '09.

Working our way to the bottom line, net income for the quarter was 3.2 million or $0.08 per diluted share compared to Q2 '08 net income of 1.1 million or $0.03 per diluted share, and Q1 '09 net income of 800,000 or $0.02 per share. Diluted shares outstanding were 41.5 million in Q2 '09, a decrease of 1.7% and 1% compared to Q2 of last year and Q1 '09 respectively.

Intelligroup continues to purchase shares under its share repurchase program. We purchased 86,000 shares of common stock during the second quarter at an average price of $1.41. So far in the third quarter, we have purchased another 280,000 shares at an average price of $1.52 bringing total purchase till date in 2009 to 951,700 and the total purchase since the inception of the program in Q4 of last year to 1.31 million shares.

During the quarter, we won 32 new customers, matching the number achieved in Q1. While these were generally smaller initial engagements, this reaffirmed our belief that there seems to be market stabilization across most sectors. The total value of the new contracts entered into during the quarter including new engagements from existing customers was $17 million. Currently, we have a client base of 213 active customers.

Let me now turn to some key elements of our cash flow and balance sheet statements. In terms of cash flow, we were able to generate cash from operating activities of $4.4 million during the quarter, bringing us to 20.2 million of cash and cash equivalents including short-term investments and net outline of credit borrowing as on June 30th, an increase of approximately 9 million from December 31, 2008.

In summary, we believe that the disciplined cost management, increased productivity and hopefully an improving business cycle will all add up to an operating performance that can have potential to create value for our shareholders.

With that I think we are now ready to proceed to the Q&A session. Julia.

Question-and-Answer Session

Operator

(Operator Instructions). Sir I have no questions at this moment. I will turn the call back to you. One moment please, I do I have a question from the line of James Friedman. Please proceed.

James Friedman - Susquehanna Financial Group

Hi, thank you for taking my question and congratulations on the numbers.

Vikram Gulati

Thank you, Jim.

James Friedman - Susquehanna Financial Group

I wanted to ask, how should we think about the onsite-offshore opportunities going forward. Is that a metric that you feel like that you can continue to develop and what the relationship there might be to driving the continued improvement in the operating margins?

Vikram Gulati

Sure. Great question Jim. I think the onsite-offshore ratio is clearly are very, very key determinant in driving up margins. I mean more offshore work is better from a margin perspective. But more importantly more offshore work is also better from a stickiness of the client perspective.

Let me first just calibrate this by saying that the numbers that we are putting up on the call or we're putting out in the press release are numbers from a revenue perspective. If you look at it from a headcount perspective, today our offshore percentage is as high as 75%. So we have a fairly high concentration of people in offshore and the work that is getting done from the offshore, so that's obviously happening.

Since our rates from an onsite-offshore perspective are tracking the one-to-five multiple, which is one $21 offshore versus $105 onside. A company with our kind of rates and our kind of parameters will take longer to move the meter much, much more significantly towards offshore.

However, clearly we are trying to push for that end as growth comes back. We think we will see much more improvement from an offshore percentage perspective, but clearly we are driving for more annuity business which will tend to be much more offshore-centric.

James Friedman - Susquehanna Financial Group

Okay. And also I wanted ask with regards to the utilization, maybe if you could explore the same discussion with utilization and that relationship to the operating margin?

Vikram Gulati

Sure again there is a clear correlation between every two or three points of better utilization to margins. I think we have reached a point where we will hold the utilization of the current level for the foreseeable future. And I think what has happened, what is more important to understand here, when you manage utilization there is a tendency to perhaps touch the muscle on the bone of the operating structure of the company. And we have been very, very cautious not to do that.

So as we have taken certain decisions to rationalize people based on the demand, we have been very cognizant of the fact that we do not touch the muscle or the bone and keep the company extremely, extremely strong to take care of future growth. We don't think we will go above this number as of now, given what we are seeing from the market demand perspective.

Keeping this number where it is, is important. What's also important is that even if we start seeing 5, 10% sequential growth in the future quarter if it happens, we should try and keep the utilization at about this level so that we can release much more margins from that new growth when it comes in.

James Friedman - Susquehanna Financial Group

Got it. Okay. Congratulations on the quarter.

Vikram Gulati

Thank you, Jim for your questions.

James Friedman - Susquehanna Financial Group

Thank you.

Operator

And I have no other questions at this time, sir.

Vikram Gulati

Thank you, Julia. In closing we are pleased of our execution in the second quarter and the first half of the year. We are optimistic about the balance of the year and remain confident in our strategy and new client pipeline. Of course, neither the results of this quarter nor our optimistic prospects of the future would be possible without the enormous dedication and professionalism of our entire team. To them, I am extremely grateful.

I thank all of you for joining us today and look forward to keeping you informed on our progress. Despite the current industry challenges, we are committed to a proactive Investor Relations program and will continue to devote time to introducing our story to a growing base of investment community professionals.

Given the limited profile of our company over the past few years, we believe this as such is particularly important as it builds a base of awareness and relationships that we believe can support our company going into the future.

Should you have questions or wish to meet with our team, please contact our IR representative, Norberto Aja at 212-835-8500 or via e-mail at [e-mail]. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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