Inventurus Knowledge Solutions Limited analyst Q&A

Thank you, Sachin. Good morning, everyone. We have already covered the highlights on this slide, so why don't we dive straight into our cash flow metrics, Saransh if we can go to the next slide. In terms of operating cash flow, we ended the quarter at Rs. 165 crores and free cash flow came in at Rs. 137 crores. These numbers are net of an upfront performance guarantee we have extended to the tune of $5 million to a multi-specialty primary care organization, one of the market segments that Sachin had highlighted earlier in the call today. With our continued strong cash generation, our net debt position continues to improve. As you can see by the end of the quarter, our net debt position stood at Rs. 448 crores and the continued cash generation in the future quarters is where you will continue to see this number improve. If you can go back to the previous slide. Our EPS for the quarter stood at Rs. 9 which represents a 58% growth year-on-year and a 2% growth quarter-on-quarter. Our return on equity metrics again remains very healthy and very strong. For the quarter, our return on equity metrics stood at 31%. So, I call out a few highlights on this slide. In terms of FOREX impact, it was quite insignificant and minimal in the quarter. Our employee benefit expense in the quarter stood at 52.3% of revenues compared to 51.8% in the previous quarter. This increase is despite the net reduction in employee count because we do continue to invest in technology as well as increments. And despite this employee benefit expense increase, our EBITDA for the quarter came in at 32% which is a meaningful 90 bps improvement from Q4 where we reported 31.2%. Looking at PAT; PAT came in at 20.5% or Rs. 152 crores. Again, the growth in PAT is in fact even faster than EBITDA growth largely because the finance cost continues to come down. You will note that the number was actually Rs. 26 crores in Q1 of last year versus Rs. 18 crores in the current quarter. And that is reflective of our debt repayment as well as the lower interest rate. Our ETR for the quarter stood at 22%. We have lost tax breaks in one of the SEZ units that we operate out of. For the full year, it's likely to remain in the same range. Our adjusted profit for the period adjusting out amortization of intangible assets stood at 22.7%. Saransh, if we can go and look at the next slide where we talk about our important KPIs. Our adjusted EBITDA number for employee annualized continues to improve quarter-on-quarter. As you can note, it was INR 0.8 million in the quarter. Our revenue from top 10 as well as top 5 customers continue to improve with our continued winning of client deals that you would have noted both in Q4 as well as Q1 now. Aging of top 10 and top 5 customers, again, the vintage remains very-very strong at more than 5 years in both these categories. Compared to Q4, the slight dip is in fact due to the fact that some of our newer customers have ramped up much faster than what we have historically. Thank you, Sachin. Over to you. And we continue to expect to report healthy numbers in the future quarters as well.

Great. Thank you, Nithya. Again, excited about our performance this last quarter and what it means for the future. Also, in line with continuing to build both best-in-class governance as well as surround ourselves with some of the wisest and most contextual minds in healthcare, happy to note that we are adding Dr. Garheng Kong to our board. Garheng is quite an exceptional professional and leader with undergrad degrees from Stanford and MD, PhD, MBAs from Duke. But equally importantly, after a flourishing career in consulting, including at McKinsey, he started his own fund, HealthQuest Capital, which now invests across the entire spectrum of deals from startups to publicly traded companies. He is a lead independent director on large publicly traded companies like LabCorp and also happens to be on the board of the Duke University Health System. So tremendous context and leadership and we will continue to see that we will do whatever we can, whatever makes sense to surround ourselves with thoughtful leaders that can keep us both grounded but continue to expand our aspirations in the marketplace. Excited to have Garheng. With that, I think that concludes our prepared remarks for the quarter. Again, very excited about our performance last quarter. The teams have worked really hard and happy to take questions from you. Over to you, operator.

Thank you very much, sir. We will now begin the question-and-answer session. The first question is from the line of Sagar Dhawan from Valuequest. Please go ahead.

Thank you and congratulations on a good set of numbers. My first question is on the growth that we are seeing in the top 5 client bucket. I just wanted to understand better what is driving this. Is this just sort of one client scaling up or is it more broad-based? Is it other ideas which I thought I was assuming was it due to cross-selling of AQuity into the cross-selling to a new AQuity client or is it more outsourcing by some of the clients? Just wanted to understand what is driving this and how sustainable is this in the near term? Should we assume that such kind of growth will continue in the near term as well?

Great, thank you for the question, Sagar and thank you for joining this morning. Yes, look, I think our top 5 customer trend is healthy and I think the answer lies in all of the above in the points that you noted. There is momentum being seen on the cross-sell of AQuity in one of the customers. There are these large platform deals that we have signed that have kicked in into that top 5 and the reality is, Sagar, if you think about it, when I look at the wallet of our top 5 customers, the wallet potential for our platform, we are nowhere near 100%. So, I think one, it's a great sign that the top 5 customers are growing and sure, if we continue to execute like this, there is no reason to believe that the top 5 customer growth should be there. Now, you might not see it linearly like this in every quarter, but when you look at it over a significant time horizon, given the wallet opportunity of our top 5 customers and the strength of our platform, there is absolutely reason to believe that that growth should sustain.

Understood, sir. And just on the Palomar deal, if you could provide an update on how it is scaling up because it's been like 8-9 months now. Are you seeing the upsides that you had thought about?

Sagar, thank you for asking again. Yes, I think we are ahead of plan actually. I can't go into the specifics here, but I would like to say that so far, we have been delighted. Our teams have executed tremendously on the deal, even as we are not even fully implemented on all the features of the platform. Our financial pro forma 6 months in is better than what we thought it was going to be, even though we are not fully implemented. So, we continue to be really optimistic about what the Palomar deal will produce for us and at what pace. Also, as you know now, the one concern that some of you had about the financial future of Palomar, that continues to be looking a little bit more constructive and that creates its own additional opportunities, depending on which system eventually ends up with them. So yes, very positive on the Palomar deal.

Got it. Understood. And one last question from my side is on the tail cutting that we are doing on the AQuity side. Just wanted to understand how meaningful of a drag that has been on the growth in this quarter and what could have been the growth if the tail cutting was not happening?

Sagar, I think I will refrain from providing those specifics, but I will say that it's material. I am comfortable saying that the drag is material and that is why even as we are continuing to be intentional, we are trying to manage the drag in a manner that the cutting of the tail is real, because the reality is that cutting of the tail is also helping with margin growth. But at the same time, it's not so dramatic that it offsets our organic growth, which I think is returning back very strongly. So, material drag, but managed to the best of our abilities.

Got it. And till when is this process going to continue? You said you want to reach about 500 clients, but just a rough timeline as to when this process could be completed?

You know, that's a tough one, Sagar. Look, it could be as much as another two to three quarters, because like I said, there's two factors here. One, even as you want to cut the tail, we don't want to let the customers down. They have been relying on us for performance, so we can just sort of knee-jerk out of it. And second, the reality is we don't want it to have a dramatic drag in just one or two quarters. And so, I think perhaps another two to three quarters is the way to think about it. And we will let you know if that changes.

Understood.

Because the question is about 150 odd customers.

Got it. Thank you for taking my questions and all the best. Thank you.

Thank you, Sagar.

Thank you. The next question is from the line of Srinath V from Bellwether. Please go ahead.

Hi, Sachin. Taking on the same kind of Palomar discussion, I want to understand what is the path of the full implementation of the care enablement platform? How does this whole thing work? And I want to understand, if we assume they have 100 physicians, roughly how many of their physicians have like partially taken one of the main suites of products of ours? What percentage of the physicians have actually taken the full platform? And would it be fair to assume that somewhere in this financial year, we would reach peak revenue potential in Palomar? Just want a qualitative understanding.

Yes. Great. Thank you, Srinath. Great question. So first of all, the commitment as a part of the deal is for 100% of the physicians to take the full manifest of the platform. So that is the definition of the full implementation. And the way we are rolling it out is there are some features that are already centralized in the way they operate. Those were the features that we implemented first, because what is already centralized is easier to drive as a part of the platform. And so those have been clearly implemented already. And the others are well on their way. It is totally fair to assume that perhaps by the end of this fiscal, which is fiscal Q2, we would be fully implemented across all the features, across nearly 100% of the physicians at Palomar. And so, yes, we would have reached our peak revenue potential at Palomar at that point. Now, again, our peak revenue potential is, as you know, driven by two aspects. One is the platform fee, but then really the kicker comes in the upside. And so those upsides will obviously be evident in our accounting numbers at the end of the year, because that's when they are calibrated. But yes, on the platform fee, the peak would have been achieved by the end of fiscal Q2. You were asking about how long does it typically take? It's a work in progress. It depends on the change management sophistication in the organization. It depends on how much is already centralized versus not centralized. How good are the physician champions in the organization that are able to drive the change? How long does it take us if it's an EHR when we already have integration versus an EHR where as a part of the deal, we have to build the integration. So, there are three or four factors that go into defining how long the full platform implementation might take. But of course, our objective is, on an overall basis, eventually to get to a point once it's more mature, where over a 120 to 150 day period, we can have the full platform implemented across the entire physician base of the customer that we are committed to.

Perfect. I wanted to understand, given if Palomar does get acquired by one of the other players, this is a very IT question, bear with me on this. There's normally some sort of vendor consolidation that takes place. How have you assessed risk? Would it be fair to assume since we are so well integrated into Palomar that we are somewhat safe from vendor consolidation? Any broad views that you have on this, that would be great.

So given that we were potentially anticipating a change of control, even when we did the deal, Srinath, we had already built a no out in the event of change of control. So first of all, there's a very penal contractual protection that will probably be a huge deterrent. But we don't like to rely on just the contractual protection. So, the real value is the excitement that we are experiencing from the Palomar physicians. And what we are most excited about in talking to the CEO is the fact that if we are able to demonstrate the type of ROI that we are talking about, Srinath, I think it will be like, impossible to imagine that whoever the acquirer is, whether it's UC San Diego or one of the other two systems, they would not want to adopt some manifest of such an approach in their employed physician base, which are, their employed physician base is 10X the size of Palomar's employed physician base. So, you never know what exactly will happen. But one, I think we are contractually totally protected. And second, I think there is more opportunity than risk in Palomar integrating with one of the large systems in the area.

Perfect. Just the last question on AQuity, I want to understand what percentage or anything you can share on AQuity customer migration to the Ambient AI IKS product, given that it delivers significantly more value at a significant lower price, one would assume that within one year, which would be a standard contracting cycle, then a large part of customers would have migrated, but I don't think that that is the case. So, I want to understand, where are we on the migration? Is it 30%-40%-50% of the customers? And if there's a bottleneck, what would be the bottleneck? And thanks a lot for answering all my questions in great detail.

Sure, Srinath. No, I think, look, the bottleneck is really organizational inertia more than anything else. And so, these are large health systems that have relatively long decision cycles. And so I would say that we are not near the completion of this transition. And like I was saying earlier, I think just like the cutting of the tail, perhaps has another two to three quarters of runway. I think the remainder of this fiscal year is probably a good way to think about when that transition might get completed. Different customers are in different stages of that transition. And remember, the transition is in two features, not just a little documentation, but we are also driving that transition in medical coding. But again, they were in medical coding in a very heavy human-led, stateside human-led model. And now with our autonomous coding across two specialties and our superior global execution coupled with that autonomous coding, we are also driving transition there. So I would say perhaps a fair way to think about it is over the rest of the fiscal, we should have largely completed that transition.

Thanks a lot, Sachin.

Which is why by that time, we would have gotten our operating margins or EBITDA to a place that could perhaps be called, sort of steady state.

Perfect. Thanks a lot. I will get back in the question queue.

Thank you.

Thank you. The next question is from the line of Ruchi Mukhija from ICICI Securities. Please go ahead.

Thank you for the opportunity and congratulations, Sachin and team, for a great set of numbers. First question, we are now in 18-month journey of transitioning AQuity business. Also, the loss of large client and the start of last fiscal is in the base. So, is it fair to assume that as we transition to different quarters of current fiscal, we should see the YOY growth momentum of our business accelerate and move more closer to what we used to do prior to AQuity, more like a 20% growth mark?

Hi, Ruchi. Thank you for the question. As you know, we don't give guidance on future growth, but I think the cues lie in the answers that I sort of tried to give earlier, which is, I think we still have two to three more quarters of AQuity customer tail reduction as well as AQuity margin optimization. And so perhaps fair to assume that the headwinds in revenue associated with those two endeavors should be completed by towards the end of this fiscal, let's say fiscal Q4. So, I think that probably is the timing to think about the return to pure growth versus pure organic growth being offset by some of this intentional headwind that we are driving to try that sort of balance between revenue growth and margin growth, so end of this fiscal.

Secondly, in our top 5 clients, looks like the Palomar deal has scaled up and now we have different set of top 5 clients. Also, it would be great if you could talk about the transition time for Palomar and do we expect transition time for the Western Washington Medical Group with two to three quarter transition? Should that also lead to change in our top 5 customers?

Good question. Palomar, like I was saying in my earlier question, I think by the end of this quarter, the current quarter that we are in, we should have completed the full implementation. On Western Washington, yes, I think it's a fair assumption that in about 120-odd days from now, we should be fully implemented. It's subject to us getting the full epic integration going, which we are working on. That's the only sort of bottleneck there and we are working through that process. So perhaps another 120-odd day, whether or not Western Washington enters our top 5, I can't tell you, Ruchi, right now because it's also a function of what happens to the current top 5 and how quickly they grow over the next 120-150 days. But obviously, it will become a substantial customer and certainly in the top 10, perhaps in 120-150 days from now.

Got it. And lastly, could you highlight to us how the cross-sale business or cross-sale activities are planned out during the quarter, selling IKS solution to AQuity customers?

Like I was saying earlier, I think we are still in the early innings of that journey. But the good news is that I think we have figured out how to orchestrate it, more or less, how to work in that motion that is activated by the legacy AQuity salespeople and then how they partner with the sort of overlay partner sales engine that we built that can elevate the conversation. So, I think plenty of green shoots. One, we actually announced publicly our top 5 health systems in the country where we have driven a cross-sell motion very successfully. And there are several others in the hopper. Another one of them is a top 5 health system in the country. So, I would say still early, but I feel like after a whole bunch of trial experimentation, what works, what doesn't work, how to incentivize both the sales engines appropriately, first trying to do it with a platform approach, but then learning that large health systems don't yet have the appetite for the platform approach, but have much greater proclivity for point solution. I think we have figured out the motion. And so, hopefully we will see the fruits of that. And I can do a second tick mark on that cross-sell motion in the next quarter.

Got it. This one is for Nithya. You did mention that this quarter we paid $5 million as part of one of the deals. Do we expect such payout during the current quarter besides Western Washington Medical Group in any of other deals?

Ruchi, I will obviously not be able to talk about what might or might not pan out in the current quarter, but I think from a more philosophical perspective, Sachin and I had mentioned earlier that in each of the market segments that we operate in, we might do one deal or two. These almost always tend to be full platform deals and these tend to be very, very long-term deals as well. This helps us establish the benchmark in terms of what a platform deal can deliver in each of these market segments.

Got it. Thank you and all the best.

The next question is from the line of Nilesh Jain from Astute Investment Management. Please go ahead.

Thank you for the opportunity and congratulations, Sachin, for a great set of numbers. My first question is on your revenue growth. Obviously, top 5 has grown very well to the north of 70%. But when I look at your other top 5 clients, apart from top 10, it has been flat more or less. How should we look at the top 10 growth apart from your top 5? Maybe you can talk about the organic side of the growth. We can understand that over time, once you cut down the tail, we can expect that at least you grow faster than the outsourcing industry, which is expected to grow at 12%.

I think, again, I will just sort of at the risk of being repetitive, I will say that, first of all, on a quarter-on-quarter basis, it's not easy to… I wouldn't call one quarter a trend where the top 5 are growing and the top 10, the next 5, which are the top 10, are not growing so much that now that's a trend. I wouldn't go so far as to say that. Let's play it out. Right now, I can tell you that we are seeing fairly secular growth across existing customers and the new pipeline. And as you can imagine, given that the cutting of the tail and the transformation of the AQuity book has a drag on the revenue growth, and I said it's a bit of a material drag, you can estimate what the organic growth really looks like. And that's what I would say. It's very hard for me. And I am deliberately not trying to not answer your question, but I don't want to give guidance, number one. And number two, I continue to believe passionately that if we continue executing it the way we are, we will continue to grow significantly faster than the 12% TAM growth.

Probably, maybe you can just help me with the organic growth, just a rough range, that will be helpful.

What do you mean by organic growth? All growth is organic only.

So last year base would have an AQuity number as well which we might not have grown as compared to, I guess, legacy clients.

By the same quarter last year, the integration was complete. So, all growth compared to Q1 FY25 is all absolutely organic growth. So, because there is growth in some AQuity customers as well. If you are asking me to tell you what is the reduction of revenue in AQuity and increase in IKS, that unfortunately I can't do because we are really operating like one company. Now there's no longer an AQuity account or an IKS account. There are so many accounts that where we have already activated a cross-sell motion. And so those accounts are joint customers. So, I don't know whether to account their revenue in legacy AQuity or legacy IKS. I don't know how to strip those out together. But again, I think if you just do broad math around, we have 16% growth in spite of a material headwind associated with what we are deliberately doing on customer tail and revenue optimization, it should give you a fairly decent idea of what the growth net of that or prior to that would look like, right?

Okay. No problem. Thank you. My second question is on; you talked about radiology partners. So just wanted to understand how is that progress going on that side and are we looking at any JV sort of transaction there?

So that relationship is interesting in that it has not yet converted to a JV. The way we have structured that relationship was that it has to grow to a certain threshold, at which point it makes sense to JV. The relationship has not yet grown to that threshold. So, I don't see a JV conversion happening in the next couple of quarters. But we will continue to track how that goes. The key there is my whole concept on a JV here Nilesh on any of these JVs is first the customer should have fully manifested the platform in their install base. Now there are 3,000 radiologists, there's still a long-long way to go before a large part of their 3,000 radiologists have adopted this program. Also, we have already started to figure out a whole bunch of tech interventions that are changing that virtual radiology system model, even as we were implementing them. So, I think more to come, not close to JV yet.

My last question is to Nithya. I wanted to understand on the employee side, obviously we have been reducing the employee count since last few quarters. So, I wanted to understand how do we see the general trend in terms of, are we done on more or less on the rationalization of the employee side? How do we see there's further scope there?

So, you will obviously see a balance in terms of our continued optimization of the legacy equity workforce. I think like Sachin pointed out, there is at least another two to three quarters where we will continue to optimize and we deploy our technology and achieve the right balance between on-shoring and off-shoring. However, we are of course growing, even as I say that at the same time, we are also growing significantly in other parts of the business. And therefore, we do need to support that growth with additional employees, both in terms of technologies as well as other administrative employees. So, I think overall, you will probably see that number inch up in the rest of the year as we continue to support the growth that we have been facing.

Sure. Just on the EBITDA margin, you know, once we reach mid-30s, do we expect to see further scope of expansion there of margins over time 2 to 3 three years timeframe?

Look, I think we have said continuously that we expect to get somewhere in the early to mid-30s. As you can see, we are already past the early 30s, almost well ahead of what we had said. And so I just still maintain that, Nilesh, that we will see ourselves getting to early to mid-30s and we think margins should stabilize at that rate. To try and say that margins could improve beyond the early to mid-30s, I don't feel comfortable saying that. I think our target still continues to be early to mid-30s. And as you can see from our performance, we feel very confident about achieving that.

Thank you and I wish you all the best.

Thank you. The next question is from the line of Seema Nayak from ICICI Securities. Please go ahead.

Hi, congratulations on a good quarter. With the headcount down about 300 Q-on-Q, how far are we pushing this lever? And with new deals announced, is there going to be a hiring expected going forward? And what is your ideal annualized EBITDA per employee that you are targeting?

So, look, I think on the headcount, yes, there will be quarter-on-quarter fluctuation based on deal ramps. But I think, which is why I constantly point everyone to please look at year-on-year trends versus quarter-on-quarter trends. The trend that you are seeing year-on-year is a real trend. The trend that you are seeing in consecutive quarter is loaded with all sorts of noise around one customer ramp related to things happening in that customer, a new customer start. So, I would suggest, if you really want to trend that, please look at it year-on-year. And that year-on-year trend is probably the most telling factor. On the EBITDA per employee, look, the way to track this is really, like we have said, early to make EBITDA at the corporate level. Because also remember, we were traditionally 1.5%-2% R&D expenses. Today, we are close to 5% R&D expense. And we are setting up an AI centre of excellence. We are just about to announce a chief AI officer under which the centre of excellence will be built. There's a whole bunch of things happening that are factored into our sort of general thinking of early to mid-30s. And at least my humble belief is that with the type of growth that we are driving organically, with these types of early to mid-30 margins sustained and the type of ROE, I think this is probably a good place to be. And that's sort of how I would suggest we play it out. But if there is anything else specifically that you are looking for in the EBITDA per employee, we can take it offline. But I think in general, I would say, I will point you back to early to mid-30s operating EBITDA in spite of continued investment in sales and marketing, and significant continued investment in R&D.

That's helpful. Thanks.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Saransh Mundra for closing comments. Thank you and over to you, sir.

Thank you, everyone, for joining the call. Please reach out in case you have any additional questions. We will be very happy to answer. Thank you.

Thank you very much, sir. Thank you, members of the Management. Ladies and gentlemen, on behalf of ICICI Securities that concludes this conference. We thank you for joining us and you may now disconnect your lines. Thank you. Please note that this transcript has been edited for readability.