Mkt is untapped; 90-95% clients not fully using cloud: 8K Miles

Cloud computing firm 8K Miles Software Services posted a 16.6 percent rise in revenue at Rs 86.35 crore versus Rs 74.05 crore in the fourth quarter ended March.Speaking to CNBC-TV18, Suresh Venkatachari, Chairman and CEO of the company, said while the company's growth rate was moderate on account of higher revenue base, its margin declined in Q4 due to higher employee addition in the US. However, the company is offering a service model which will improve margins over a longer period of time, Venkatachari added.He believes that the market still remains untapped as 90-95 percent of its clients are not fully using cloud services.Below is the verbatim transcript of Suresh Venkatachari’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: You can’t argue with numbers like this when there is a 100 percent jump in revenues quarter after quarter. Let me play the devil’s advocate, you were growing at probably 140 percent four quarters ago, now you are growing at 100 percent in terms of revenues. You were growing at 25 percent profit growth four quarters ago, now you are growing at 10 percent. What is the new normal for the next three quarters? A: The base of our revenue is increasing and that is the reason you will see a small differentiation happening in the revenue side. We have done decently this year with Rs 272 crore compared to Rs 145 crore in the last year. Also, this quarter we have added quite a bit of new employees, close to 32 employees in the United States. So, that is the reason in putting off a little bit of profit margin. However, we are accelerating our growth and we see in the next two to three years, the cloud transformation is going to get major thing in all the regulated industries and even in the non-core industry. So, we are actually making ourselves ready for the growth because it is very crucial that we get into more number of enterprises very quickly so that we can leverage a complete footprint. This is actually a year where we started going multiple million dollar customers and also getting a deep penetration in the regulated industry. Latha: What should be the earnings growth expectation, should it be 25-30 percent? A: We would like to do the growth but we don’t give any forecast currently, any guidance. All the efforts are going in the right direction to increase the growth and where we see the market is still pretty much untapped. If you see, even though cloud everybody started now adapting, still pretty much, more than 90-95 percent of the customers are not fully into the cloud. They were actually using the cloud only for say analytic purpose or non-critical workloads. If you see the major workloads like applications, major enterprise resource planning (ERPs) migrating into the cloud so the Managed Services business will grow and also the main core businesses also can able to move across the private and public cloud. So, those shift happens, the revenue can accelerate. At the moment we could be able to grow pretty much on similar lines and we are building our solutions and offering a more service model where that could increase our profitability over a period of time.Sonia: You spoke about the higher employee cost that have hit your margins this time. Was there any kind of one-offs, any bonus that you announced in this cost and what would the average employee cost run rate be say over the next couple of quarters, will it be as high as this time? A: This quarter we didn’t give extra bonus; that is not the reason for the cost. It is actually we added 32 new employees in the United States, so, that cost gets added because these people will be productive only in the next or the following quarters fully. So, that is the reason. Our average cost of the employee is pretty much standard and our average increase probably would happen between a 7 percent and 10 percent is a normal course. Also, how we are handling the cost increase against the profitability’s actually getting more into our Managed Services and our Access Governance as a service and using of platform, those are actually high profitable. However, if you talk about architecting a system for a customer or a consulting, that margin is based on the people. So, that is where the pressure comes. However, it is the entry point to a customer where you go and provide a cloud architecture services or a cloud transformation advisory services, the moment people started using the cloud where you automate it, most of the platform and that has to be monitored through our Managed Services platform. So that would improve our profitability. Latha: The market is somewhat disappointed that it has not got its 20 percent growth; the stock is down about 3 percent. Whatever you can guide, will you be able to do Rs 300 crore this year; you did Rs 272 crore last year. Give us a directional guidance and more importantly margins, since you say you have added people your margins have improved year-on-year (YoY)? Is there more scope for improvement, does it get to 35 percent? A: As I told you, Managed Services under SaaS model, platform model gives us a much higher margin. The gross margin would grow probably about 45-50 percent so that will yield us a more profitability down the road if you see. If you see on the YoY, we have performed pretty well in terms of even profitability on the whole. Overall we got about close to Rs 43 crore after minority interest compared to previous year and we doubled our revenues. So, I think we could be able to grow more profitability in the next coming years using our automated platforms.