Aurum Proptech (Majesco)

Revenue and ebita margin both expanded. From loss to profit

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Did anyone attend earnings call of Majesco? I had to log out after 30 minutes of the call because of other commitments. Here are a few points I noted:

  1. There is a slow down in the progress of a large project, which could impact following quarter, but it not a loss of deal, just revenue will be right-shifted.
  2. 18%+ of revenue is cloud fee. Cloud fee is charged as a percentage of premium collected by customer on the cloud.
  3. 60-70% of the pipeline are for cloud hosting.
  4. Small insurance companies and new businesses of large companies are more interested in hosting on cloud.
  5. though the initial license fee could be lower on cloud, compared to traditional onsite product installation, this is more profitable for long-term, as the customers ramp up their business, Majesco earns more fee.

Someone in the thread has raised question about lower license fee. I think that this cannot be compared with traditional onsite product installation, as Majesco is focussing more on cloud business, and cloud fee need to be watched going forward.

Views welcome.

Disclosure: Invested.

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Q2 to be softer; QIP plans to aid aquisitions: Majesco

Read more at: http://www.moneycontrol.com/news/results-boardroom/q2-to-be-softer-qip-plans-to-aid-aquisitions-majesco_7299461.html?utm_source=ref_article

My notes from the AGM (about 2 weeks back):

  1. there are about 50 vendor players catering to the insurance market. A couple of IT research agencies have put Majesco among the top 3. The top 3 guys are Guidewire, Duck Creek and Majesco.
  2. Mgmt now talking about the lower end of FY18 guidance i.e. 200m$ (earlier band was 200 to 225) and that too is contingent to a few acquisitions coming their way.
  3. The two acquistions Coverall and Agile have been working well. Both were acquired for their clients and not just to acquire capabilities. Coverall was getting stagnant on a standalone basis and Majesco managed to take it to the next league in terms of revenues. [One of my industry contacts at Majesco was of the opinion that CoveralAll acquisition and its management team have simply been brilliant and have been a good value add to Majesco.]
  4. Coverall came with 170 ppl largely at onsite and some at Pune. Agile Consulting had 57 ppl. all at onsite. When asked about what’s their plan with these resources, mgmt indicate that a few of the Coverall staff would be inducted into their offshore office. [These would be high cost labour and i’m thinking these would be the first on the chopping block if new business doesn’t come through. Essentially, Majesco has a few levers to cut costs]
  5. Rnd Expenses to come down to 12% as a % of sales. Absolute figure will go up from here as sales increase.
  6. Organic growth rate shall continue to remain healthy but will not be enuff to reach 200m$.
  7. Seeing more cross selling opportunities within existing clients [when quizzed about lack of new client announcements on bse]
  8. There is no publicly available data about market share.
  9. Their core insurance platform comprises policy, billing and claims. New acquisitions would be around filling capability gaps around agent interfacing, predictive analytics etc. Acquisitions only if they come with new clients and for acquiring industry talent. This is a strategy to avoid spending time on developing capabilities inhouse.
  10. Partnership with isign and egain to offer bundled solutions with clients. This is not a revenue sharing model.
  11. US will remain a dominant market for Majesco.
  12. Insurance clients replace their platforms once in 10 years. It tends to be a sticky business once a vendor comes onboard.
  13. There are 2000 companies. Each company may have one platform for one insurance line of business (approx 4-5 platforms per company). That’s the size of opportunity in US.
  14. US writes 26% of total global premiums. In Us, everything is insured.
  15. Current US business deals with only insurance carriers and not distributors. Scope to expand business in that direction.
  16. QIP will happen in Indian market in the next couple of weeks. Majesco US shares are below intrinsic value as per management.
  17. A client may acquire the product outright for which they are charged a license fee. Its an annual fee and not a perpetual license fee. Fee based on size of company/premiums underwritten etc.
  18. Prof Services - Fees charged for implementation and customization of s/w product
  19. Consulting - MEant for program management and advisory services
  20. Cloud - Smaller clients (presumably tier 2 and tier 3) can’t afford upfront license costs as well as hosting the platform. So Majesco hosts the platform on a private/public cloud. This reduces upfront costs. Majesco charges setup fee + monthly/qtrly fee based on %of premiums or pay-per-use model. Cloud implementation competes with on-premise implementation.
  21. out of 2400 odd-staff, 500 are in US. [To me this is very high onsite concentration. These guys have to bring in sales quickly.]
  22. 20 cr capex for new facility as they are running out of space.
  23. Low cost debt from US at 3% over LIBOR
  24. Quantum of QIP - 200-250cr
  25. Guidewire does a s/w sale only. System Integration is done by a third party and not by guidewire. total cost incurred to client thru guidewire is larger. [when asked why guidewire derives 46% revenue from license fees versus 3-8% for Majesco. License fees is high margin biz]
  26. A right way to look at Majesco is to combine license fees + cloud implementation which is almost at 13%. Remember, a client either takes up a license or goes for cloud implementation.
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Thank you @hemtan100 for posting the notes.

On your point 26, don’t you think quarterly cloud fee/usage fee also need to be added when comparing with other companies who rely on traditional license fee? In the last quarter, cloud fee was slightly above 18% of revenue. What do you think?

yes correct. that was precisely my point. cloud fees plus license fees is your annuity income repeatable year after year.
5 years back, the same model would have yielded high license fees. With the advent of cloud, license fees have been cannibalized.

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Dear hemtan100 , any idea on how to calculate the intrinsic value of MAJESCO internally , i mean , through our forum members ? Mr Sumit indicated earlier in this thread that MAJESCO needs to be evaluated on EV/Sales . What is your opinion ?

Regards

The story has lost some sheen after Q1 results and commentary. I did not know that they had to do one acquisition to achieve targets. Lower end of guidance doesn’t inspire confidence. I have exited recently to invest in other surer bets. Also, wanted to focus on stocks with near term earnings bump up. I am left with Take Soln, Cambridge Tech and Allsectech in IT sector.

Sumi how do you compare Cambridge go kellton? Thanks

Cambridge promoters are class apart compared with Kellton. Was a huge mistake to fall into the momentum trap despite knowing the difference. CTE’s biz model is still evolving and needs faith and trust to hold it. I think their current organic growth plan till March 2017 itself will be enough to give good returns from CMP. On longer term (3-5 yrs) there are many triggers like investments in 50 startups which could bring huge value. Best part is that these investments are coming from own free cash flows. Mr. Kalra was a VC for quite sometime and his strategy is solid with clear no to M&As. I have to trust his capital allocation skills.

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Ev/sales is appropriate for now as they are profitable to a small extent. However i wud focus more on profitability metrics this year. For example the moment they start clocking 140 m$ annual revenue run rate, the traction on ebitda margin expansion is a key monitorable. Eventually the path to mid teens ebitda by fy18 is what i am watching closely.

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An article in ET dated 02.09.16, which very well summarizes the business and opportunities in the company :

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Nice views hemtan, by EV you mean the mcap? Is it possible to provide the ratio in numbers? Thanks in advance
Disc: invested

QIP has been postponed. Reason stated : Adverse market condition. Makes sense as why to dilute when share price is low.

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/04B03480_7C50_4433_AB75_F9DAD2A128C2_094002.pdf

IBM in 5 year deal with majesco for IBM watson

I will be curious if and how the cloud business will cannibalize the core - existing customers moving to cloud which is lower revnue and profits?

no QIP means acquisitions go on the backburner although Farid did mention that they were looking to tap other channels to raise funds. However I doubt that since in their US concal they stated that Indian markets were more conducive for a QIP and now Indian markets too have turned adverse!
To me this looks like going back to basics - focus on organic growth, forge partnerships to plug capability gaps (IBM, isign etc.) and keep a tight leash on costs.

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Guidewire software net profit margin is between 3 to 5% only. Can we expect better margin from Majesco since they are mainly operating from India?

Could anyone highlight what IP differentiation this company others versus various other platforms and solutions for the insurance space. Many of the software companies claim IP differentiated products but their core offerings seem similar to the variety of solutions in the market.

You may be right in saying that there is no great differentiation in how product feels and behaves. However, clients select a product on various other parameters like capability to build further enhancements etc. Majesco also scores in being cost effective and cloud offerings. I’m not an IT guy but Gartner ratings do matter where many of its modules are rated higher (top 3) while it is clearly leading in offering cloud based solutions to midsize insurers.

Disc: Sold out due to lack of confidence in their guidance.