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Majesco (NYSEMKT:MJCO)
Q3 2019 Earnings Conference Call
Jan. 30, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Majesco Fiscal Year 2019 Third Quarter Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Andrew Berger with Investor Relations. Please go ahead, sir.

Andrew Berger -- Investor Relations

Thank you. Kristie, and good afternoon to you all. A complete disclosure of our results can be found on our press release that was issued this afternoon. As a reminder, today's call is being recorded, and a replay will be available on our website shortly after the conclusion of this call.

During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. At times, in our prepared comments or responses to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or quarterly results. Please be advised that this additional detail may be one time in nature and we may or may not provide an update in the future.

Also during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in our press release that was issued today after the market closed.

Hosting the call today are Adam Elster, Majesco 's CEO; and Farid Kazani, CFO and Treasurer. At this time, I'll turn the call over to Adam. Adam, please go ahead.

Adam Elster -- Chief Executive Officer

Thanks, Andy. Thanks, everybody, and good afternoon. After completing my first quarter, I'm still very excited to be part of the Majesco team. The financial results we achieved during the third quarter really reinforce my excitement about our future. As you can all see from our results, Majesco's cloud-based operating model has become a critical component of our value proposition and I'm very encouraged by our success. Our results reflect growing acceptance of our solutions, as third quarter revenue increased 11% over the same period a year ago. Cloud revenues increased by 51%, compared to the fiscal 2018 third quarter and now represent over 42% of our business compared to 31% for the same period last year. Majesco's profitability has strengthened as well due to our overall revenue growth, which is being driven by higher-margin, cloud-based sales. Customers continue to partner with us and are extremely focused on where they are today and where they want to be in the future. Their strategy is focusing on optimizing technology investment and establishing a new platform for an overall digital experience. In all of my interactions with customers, partners, investors and analysts, I see incredible alignment to our vision and the validation of our strategy. Majesco has a compelling market opportunity and that is one of the key reasons I came to this company. During the last 90 days, I've learned a great deal about Majesco and the insurance market in general.

New and innovative business models, products, services and channels as well as new approaches to customer engagement has become the new normal for business and the insurance industry is no different. It demands agility, speed and innovation which is dramatically different from legacy insurance practices. And while Majesco has been an early thought leader about the change and disruption in the insurance market, we need to continue and accelerate overall market awareness of our solutions and rapid time to value.

Most insurers have built and implemented core systems around traditional business models and technology architectures. In addition, painful and expensive IT modernization projects over the last decade, coupled with layers of portals and complex integration to improve agent and customer experience, do not align and adapt well to the new market dynamics.

Overall, other vertical industries are ahead of the adoption curve, and while insurance is a very complex business, it is -- only makes the need for flexibility and scalability more important. Transforming core systems into platforms to lever broad ecosystems and technology innovations, including cloud computing, API, micro service and artificial intelligence, is the future. These technologies will allow insurers to create customer-focused products and service in matters of weeks or months instead of years.

Now, last quarter, we announced that Gartner has positioned Majesco as a leader in the Magic Quadrant for P&C Core Platforms and our recognition as a leader for completeness of vision and ability to execute has absolutely helped accelerate our pipeline and increased win rates. In May of last year, we launched the Digital1st Insurance platform, an innovative next-generation digital and micro services-based digital platform. Digital1st is very cool, and as with our thought leadership around digital transformation, Majesco has developed this solution based on market and customer feedback and this is the fast in growing portion of our pipeline and is probably the most active conversation that we're having with new customers.

Now, as we see the market, we see insurance carriers continuing to push back on multi-year, high-priced, on-premise implementation. And our platforms accelerate innovation, leverage new and growing ecosystems, provide scalability for growth and most importantly can be deployed in weeks and months rather than years. I'm very encouraged by the growing acceptance of Majesco's products, which are resonating with both our current customers and potential customers. Now, one of the things that attracted me to Majesco also was this customer-first culture that is built on trust. And our customers have trusted us to provide them with core insurance platform software to run their businesses. We are dedicated to providing them with leading products and solution exceeding implementation results and superior customer service.

The combination of providing customers with leading products and services differentiates Majesco from our competition and create strong, deep relationships with our customers. As we mentioned in this afternoon's press release, during the third quarter, we added seven new customers, we had expanded relationships in exist -- three existing customers and saw overall strong renewal yields. Some of the highlights, as mentioned, was a Tier 1 U.S.-based, carrier-focused on Specialty Insurance who's implementing their cyber liability line of business on the Majesco Policy solution. We also had a Tier 4 U.S.-based InsurTech who chose Majesco's P&C suite and Digital1st platform to support the rapid rollout of its nationwide workers' compensation program.

In addition, we had a Tier 2 U.S.-based selected Majesco's L&A and Group Suite solution, so the suite of policy, billing and claims to modernize its operations of administering Employee Benefits plans. And one of the important wins was Tier 1 U.S.-based P&C wholesale broker who selected Majesco's Digital1st platform to accelerate their digital journey and modernize systems of engagement with their carriers, partners, agents and customers. Now, each successful implementation also enhances our credibility in the market with our customers and potential new customers while demonstrating our important value proposition of speed to value. During the third quarter, we successfully went live with seven customers including a Tier 1 customer with a multi-line carrier using Majesco Billing for P&C, a Tier 1 U.S. national multi-line insurance company also using billing and several others including customers in Malaysia, Singapore that went live. Now, Majesco's partnership with these customers is critical. So, as important as it is for us to win new customers, our success in helping customers go live is critical. Now, partnerships play an important role to drive our growth strategy and solutions. One of the strategic partnerships is with IBM. The MetLife Program represents the Life, Annuity and Group segments though IBM, which represents one of the largest cloud deals and our joint IBM and Majesco team are focused on the successful implementation of this cloud-based solution.

Overall, our IBM partnership continues to gain momentum with a growing pipeline and we are actively pursuing several opportunities with Tier 1 and Tier insurance carriers in both the Life and Annuity group as well as the P&C markets. Additionally, this quarter, our acquisition of Exaxe further strengthens our position in the market. We are excited to add their team to the Majesco family and we are even more excited to introduce this cutting-edge cloud technology to our growing group of European customers and prospects.

Majesco has a compelling opportunity and I'm excited to be part of the leadership team. Our third quarter results reflect the growing momentum across Majesco and alignment to market trends in the insurance industry, I'm pleased with the progress we're making and believe fiscal 2019 is on track to be a strong year for the Company. I look forward to continuing my active engagements with investors, shareholders and updating you on the Company's future.

And with this, let me turn the call over to Farid to discuss the financial drivers for the quarter.

Farid Kazani -- Chief Financial Officer & Treasurer

Thank you, Adam. and good afternoon to everyone. I'm pleased to summarize the third quarter financials of fiscal 2019. This is the sixth consecutive quarter of consistent improvement in the revenue and profitability and we are pleased with the positive trends in the key performance metrics of the business.

Let me enumerate the key highlights of the overall performance of the third quarter. Firstly, on the revenue figures. Revenue for the third quarter ended December 31, 2018 was $35.4 million, up 11.4% year-on-year and 4% sequentially. The year-to-date revenue for the nine-month period was $103 million as compared to $90 million for the same period last year. This is 14.4% higher as compared to the corresponding period. The higher revenue was driven primarily due to the higher cloud revenue, addition of new logos, continued business engagement with existing customers and acquisition revenues from Exaxe Holdings that was consummated during the third quarter. Total cloud revenue was $15 million for Q3 fiscal 2019 and it stood at 42.3% of revenue as compared to $9.9 billion, which was 31.2% of the revenue during the same period last year, reflecting a growth of 51.1%. The cloud subscription revenue grew 55.8%, from $2.8 million in Q3 of FY 2018 to $4.4 million in the Q3 of FY 2019. As a percentage of revenue, the cloud subscription stood at 12.4% in this Q3 fiscal 2019 as compared to 8.9% in the corresponding quarter of last year. The total number of cloud customers now stand at 51 at the end of December, 31 2018. For the nine-month period ended December 2018, total cloud revenue stood at $40.5 million versus $26.7 million, reflecting a growth of 51.6% over the same period of the last fiscal.

The growth has significantly offset the growth -- the drop in the on-premise implementation revenue, which declined 16.3% from $27.5 million in the nine-month period ended 31 December 2017 to $23 million in the nine-month period ended December 31, 2018. The total recurring revenue stood at $11.7 million for the third quarter FY 2019 and it increased 39.8%, representing 33.1% of the total revenue as compared to $8.4 million, representing 26.4% for the Q3 of the fiscal 2018. For the nine-month period ended December 31, 2018, the total recurring revenue stood at $33 million, representing 32% of the total revenue and reflecting a growth of 37.6%, versus the same period last year.

From a geographic standpoint, the North America, Europe and the APAC regions represented 84.3%, 10% and 5.7% respectively for the third quarter's total revenue as compared to 87.6%, 6.5% and 5.9% respectively for the nine-month period ended December 31, 2018. In terms of business split, the P&C revenue reflected 68.5%, the life and annuity represented 30.9 and the non-insurance was 0.6% for the third quarter's fiscal 2019. The total revenue -- of the third quarter FY 2019's total revenue and 70.8%, 28.5% and 0.7% respectively for the nine-month period ended December 31, 2018. In terms of client concentration, the top customer this quarter represented 12.3% of revenue, while the top five constituted 29.6% and the top 10 constituted 43.1% of the third quarter's revenue.

Turning to profitability, during the quarter ended 31 December 2018, the gross margins were 49.3% compared to 46.9% in the quarter ended December 31, 2017. This year-on-year increase in margin was primarily due to higher revenue mix from cloud business and improved delivery efficiencies. For the nine-month period ended December 31, 2018, the gross margins were also higher at 49.1% as compared to 44.9% in the similar period previous year. For the fiscal 2019 third quarter, the SG&A was 9.7%, representing 27.4% of revenue as compared to 32.3% during the third quarter of the last fiscal 2018 and during the nine-month period ended December 31, 2018 the 670 basis point improvement in SG&A as a percentage of revenue reflected strong operating leverage and improved management of G&A expenses.

The product development expenditure was at $4.8 million for the third quarter FY 2019, representing 13.6% of revenue as compared to 14.3% during the same period of the fiscal 2018 and for the nine-month period ended December 31, 2018. The additional spends of 12.9% in R&D expenditure compared to previous year was focused on enhancing the cloud and digital offerings. The adjusted EBITDA for the third quarter ended 31 December 2018 was $4.9 million or 13.9% of the revenues as compared to the adjusted EBITDA of $2.2 million, which was 6.8% during the quarter ended 31st December 2017.

The same was also higher by 79 basis points as compared to the sequential quarters EBITDA for the period ended 30th September 2018. The adjusted EBITDA for the nine-month period December 31, 2018 was $12.8 million or 12.4% of revenue as compared to $2.8 million or 3.1% of the revenue during the nine-month period ended 31st December 2017. At a net income level for the quarter -- third quarter ended December 31, 2018, the figure stood at $1.8 million or $0.05 per diluted share as compared to a loss of $3.1 million or a loss of $0.08 per share in the third quarter of the last fiscal. Net income for the nine-month period ended 31st December 2018 was higher at $5.7 million or $0.15 per diluted share as compared to a net loss of $5.4 million or a loss of $0.15 per share for the nine-month period ended 31st December 2017. It may be noted that in the third quarter ended 31st December 2018 included an exceptional one-time legal statutory expense of $0.44 million for the Exaxe Holdings acquisition, whereas in the previous quarter ended 30 September 2018, it had an exceptional gain on account of reversal of contingent earn-out consideration of $0.84 million no longer required.

Turning to balance sheet. The cash and cash equivalent was $14.5 million as at 31st December 2018 as compared to $15.1 million at the end of September 30, 2018, whereas the total debt as at 31st December 2018 was higher at $13.7 million as compared to $11.7 million at the end of September 30, 2018. The net cash after debt was lower by $2.7 million, but after considering the upfront payment of $7.2 million for the acquisition of Exaxe Holdings consummated in the third quarter. The DSO stood at 82 days at the end of 31st December 2018. The 12-month executable order backlog increased 16.4% to $85.4 million at the end of December 31, 2018 as compared to $73.3 million at the end of September 30, 2018. The head count was higher at 2,625, which included 36 employees from Exaxe team at the end of December 31, 2018 as compared to 2,491 at the end of 30th September 2018.

Lastly, on the rights issue announced by the company on December 27, 2018, due to the ongoing SEC (ph) shutdown, the record date has now been fixed for February 5, 2019 and the expiration of the issue to take place on Feb 25, 2019.

Overall, the third quarter reflects improvement across all key metrics, including the revenue growth, customer acquisition, cloud-based metrics, margin expansion, order backlog growth and positive cash flow. This concludes our prepared remarks. I'll now pass it on to the operator to open the call for questions. Thank you very much and appreciate your continued interest in Majesco.

Questions and Answers:

Operator

(Operator Instructions). We'll go first to Avishai Kantor from Cowen. Your line is open.

Avishai Kantor -- Cowen -- Analyst

Hi. It's Avishai.

Adam Elster -- Chief Executive Officer

Hey, Avishai, it's Adam. How are you?

Avishai Kantor -- Cowen -- Analyst

Good afternoon, guys, and congratulations on a great quarter and great third quarter for you, Adam. My first question is regards to the thing that you mentioned improved winning rate. Is this a case of a strong market demand or is this is a case of guys winning share of some market share from some of the other vendors. And I don't know if you can elaborate, in case it's a winning share if that's winning share from the leaders in the industry or basically Tier 2 or Tier 3 vendors, if you can elaborate on that?

Adam Elster -- Chief Executive Officer

No, as you saw from some of the wins, they spread across the Tiers. There were some Tier 1s, Tier 2s, Tier 3s. It was a mixture of tiers where we saw win rates. I think what we did say is, we saw -- we had a pipeline the team had built up over the course of the last year and I think the sales execution was very strong in the third quarter. I think that resulted in good win rates and I think some of additional things like getting the Magic Quadrant rating and some other things going on with the Company, I think, helped accelerate some of the win rates. But I don't know if I'd categorize it is taking share, but I would say, improved execution from the sales team in our third quarter, it was really nice to see.

Avishai Kantor -- Cowen -- Analyst

Okay. And then from a big picture (inaudible), can we talk a little bit about the demand environment in Life. I mean, it's very clear that P&C is seeing a strong demand environment. Can you give us a little bit of -- from a big picture kind of the things what's happening in the Life segment of the market?

Adam Elster -- Chief Executive Officer

Sure, as I'm learning about the insurance market over the last 90 days, some of the concern that a number of people mentioned to me is that the L&A market wasn't as large as the P&C and in fact, in many cases had made changes in a number of years. But what's interesting is, now we're seeing an acceleration of L&A insurers starting to go down the road of digital transformation and the result, I think there is a pipeline growing in the L&A side of the business that might not have been in existence over the last number of years. But I think many of their home-grown systems are starting to show age, and as they're looking to long-term planning, I think we're seeing a growing pipeline around L&A which is great timing for us considering the releases of some of our recent products, our work with IBM. I think the timing is very good for us in the L&A business.

Avishai Kantor -- Cowen -- Analyst

Great. And my last question is a little bit personal for you and quite honestly I am not sure if you would be able to give -- to fully answer that, but you obviously were a top executive in large platforms of software and services companies. Anything that you -- and you've now been with Majesco for three months or so. Anything you can share with us about your long-term plans as far as augmenting and changing the operations, as any new top executive would like to do obviously when it comes in, anything that you can share maybe on the European angle would be very helpful. And again I understand if you will not fully disclose that.

Adam Elster -- Chief Executive Officer

Yeah, I mean, as you know, and I'll be shy when we met, as I told you and I'll reiterate in my first 90 days, I've spent considerable time listening, learning about the insurance market, the team, our advantage in the marketplace and I think over the coming months, we're formulating a multi-year strategy that we'll be able to talk about more publicly about where do we think our big bets are as a Company and things that we're going to do operationally to align behind those big bets. So I think we definitely have a number of things and works as far as our strategy goes, but we are still finalizing some of the execution plans against it, but as I mentioned to you, we are hoping to do an Analyst Day in May, where we are able to present to all of you a multi-year strategy of you where we see the company going and I think by that time, I'll probably give you a more definitive answers. But at this time, there are a lot of ideas and thoughts, but we're still going through some little bit more time listening and then we'll do a period of validation before we launch into execution.

Avishai Kantor -- Cowen -- Analyst

Sounds great. Thank you so much, and good luck for the rest of 2019.

Adam Elster -- Chief Executive Officer

Thanks, Avishai. Appreciated it.

Operator

(Operator Instructions). Next, we'll go to Shaimal Drew from PhillipCapital.

Shaimal Drew -- PhillipCapital -- Analyst

Yeah, thanks for taking my question, and congrats on a very good set of numbers. So my first question is on the revenue part. So this quarter, revenue included contribution from the Exaxe acquisition you included and so can you please get the number how much would be revenue contribution from the Exaxe acquisition?

Adam Elster -- Chief Executive Officer

Hi, Shaimal. The organic revenue without Exaxe has been flat for the quarter and the incremental that we've got in this quarter has come from Exaxe.

Shaimal Drew -- PhillipCapital -- Analyst

Okay. And then my second question is on the IBM partnership. So in last quarter, we had mentioned that while we have got one POC from our large insurance companies from the IBM partnership. So any update whether like what is the status of that POC looking?

Adam Elster -- Chief Executive Officer

Yeah, so we -- as I mentioned in some of the prepared remarks, we continue to see growth in the pipeline working with IBM, so we have A number of opportunities that we're working on, some are further along in the POC stage, as I mentioned in the last call, and we're hoping that one of the big accelerators for the business in the pipeline overall will be once we go live with the active project we have right now. So as many -- all of you are aware of the project that we are doing with MetLife, in fact, if you listen to MetLife earnings, they talked about their investment in a unique quota -- unique quote to claim digital operating model in partnership with IBM, which will roll out in 2019. I'm quoting what MetLife had in their earnings, that technology is based on our products and we believe when that project goes live in 2019, that will be the real accelerator to the pipeline and the acceleration of the closure of a number of those deals.

Shaimal Drew -- PhillipCapital -- Analyst

And my lasr question is on the order book. So this $85 odd million might include that -- any orders from the Exaxe acquisition. So what would be the organic order book like or Majesco order book in this quarter?

Adam Elster -- Chief Executive Officer

In the $85 odd million, OK. It's just been a couple of million from the Exaxe, the rest has been the growth that has come from the organic business of Majesco.

Shaimal Drew -- PhillipCapital -- Analyst

Okay. That's it from my side. And all the best for next quarters.

Adam Elster -- Chief Executive Officer

Great. Thank you very much. Appreciate it.

Operator

(Operator Instructions) We'll go next to George Melas from MKH. Your line is open.

George Melas -- MKH Management -- Analyst

Hi. Good afternoon, guys.

Adam Elster -- Chief Executive Officer

Hey, George, how are you?

George Melas -- MKH Management -- Analyst

Very good. Adam, how are you?

Adam Elster -- Chief Executive Officer

I'm doing well.

George Melas -- MKH Management -- Analyst

Good. If I look at the total cloud customers this last few quarters and I go back seven quarters, it increased by 1, 2, 3, last quarter they grew by 3 and suddenly now they go from 41 to 51. So it seems like you had an extremely strong quarter in terms of closing new cloud customers, is that right?

Adam Elster -- Chief Executive Officer

Yes.

George Melas -- MKH Management -- Analyst

Okay.

Adam Elster -- Chief Executive Officer

Yeah. I'd like to elaborate, but the sales team really had a great quarter. We saw really strong bookings. As I said in the last quarter, 80% of our pipeline is cloud-based deals, which is fantastic and we had a number of customers who also are converting from their on-premise solution over to cloud. So some of the go-lives as well. So, the real story is, this has been the Company's focus and the move to the cloud over the last couple of years and you're seeing that pipeline mature, you're seeing deals closed and we're seeing some of the customers are on premise starting to make the move to cloud which validates the strategy. So the simple answer is, we had a really strong new booking cloud business quarter in Q3, which is a simple answer and a good one.

George Melas -- MKH Management -- Analyst

And that includes both a combination of, I think, like you said earlier, new customers as well as customer -- existing customers expanding or contracting new work and it seems like these existing customers are making a move to the cloud?

Adam Elster -- Chief Executive Officer

Correct. We had -- as we mentioned, we had seven new customers, three customers expanded relationships, and in those cases, that is the business model, and in some of the projects, we are converting to the cloud. So I think this has been the strategy and we saw strong execution in the third quarter.

George Melas -- MKH Management -- Analyst

Great. The backlog went up -- the backlog had been down for a couple of quarters in a row and then had a big jump and there was a small contribution from Exaxe, but you had a big jump. Is that related to these 10 new -- no, seven new and three existing new projects that...?

Adam Elster -- Chief Executive Officer

Yeah, a portion of the backlog that increased was related to customers who did renewals. So many customers had renewals in December and so while we were -- they were burning down the backlog during the projects and doing the work, when the renewal came, it refilled some of the backlog from renewals. And then on top of that, what really drove it was all of these new bookings. And that was -- I would tell you that's the major driver in the increase in backlog.

George Melas -- MKH Management -- Analyst

Great. And then one quick final question and sort of piggyback on the previous caller. The P&C deal that you have, the pilot that you have together with IBM, is that making some progress?

Adam Elster -- Chief Executive Officer

Yes, but it's not -- that's -- it's a pilot that's POC. So when that turns into bookings, it's going to take a little while, and like I said for the IBM pipeline in general, the go-lives will probably be what accelerates the pipeline and win rates within that business. I think that's going to be a compelling event for all parties involved.

George Melas -- MKH Management -- Analyst

Okay, but that's an L&A, of course that's MetLife. Does that really impact and influence being key customer. It does? Okay.

Adam Elster -- Chief Executive Officer

It does in some regard related to the partnership. So there's more to -- you know again, I think there is -- it's not as directly connected, but it influences those decisions.

George Melas -- MKH Management -- Analyst

Okay. And so does that mean that with IBM right now, you involved -- of course you're doing the MetLife, you have this one P&C pilot that was mentioned. Do you have other pilots that are active?

Adam Elster -- Chief Executive Officer

We have. Yeah, we have a whole series of opportunities that we're doing joint pursuits on, that we are tracking and just -- we were just together a couple of weeks ago doing deal reviews of the pipeline and reviews. So it's a -- yeah, we have a larger pipeline review and business focus that we have with the IBM. We are co-presenting with them. I think it's -- think at their event we're, I think, presenting there with them. So I think we're just in the mode of starting to accelerate the investments around the go-to-market and the pipeline with the relationship.

George Melas -- MKH Management -- Analyst

Okay. Great. Thank you.

Adam Elster -- Chief Executive Officer

Thanks a lot.

Operator

We have no further questions in the queue, I'll turn it back to management for closing remarks.

Adam Elster -- Chief Executive Officer

Thank you, everyone. I appreciate you taking the time today. I'm glad I was able to drag you away from Tesla and PayPal and Facebook earnings. So I appreciate the time today and look forward to talking to you in the future. Have a good evening. Thank you.

Farid Kazani -- Chief Financial Officer & Treasurer

Thank you.

Operator

And that concludes our call for today. Thank you for your participation, you may now disconnect.

Duration: 34 minutes

Call participants:

Andrew Berger -- Investor Relations

Adam Elster -- Chief Executive Officer

Farid Kazani -- Chief Financial Officer & Treasurer

Avishai Kantor -- Cowen -- Analyst

Shaimal Drew -- PhillipCapital -- Analyst

George Melas -- MKH Management -- Analyst

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