Image source: The Motley Fool.
Majesco Limited (MJCO)
Q2 2020 Earnings Call
Nov 5, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Thank you for standing by. This is the conference operator. Welcome to the Majesco Fiscal 2020 Second Quarter Conference Call. As a remainder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions]
I would now like to turn the conference over to Andrew Berger, Investor Relations. Please go ahead, sir.
Andrew Berger -- Investor Relations Officer
Thank you and good afternoon to everybody. A complete disclosure of our results can be found on our press release that was issued today after the market closed. As a reminder, the replay of today's call will be available on our website shortly after its conclusion. 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 onetime in nature, and we may or may not provide an update in the future. Also during the course of this 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. Hosting the call are Adam Elster, Majesco's CEO; and Wayne Locke, CFO.
At this time, I'll turn the call over to Adam. Adam, please go ahead.
Adam Elster -- Chief Executive Officer
Thanks, Andy, and good afternoon to everyone on today's call. In Q2, we continue to see accelerating momentum and an increase in our overall cloud business as cloud subscription revenue grew 20% year-over-year. This is in direct relation to our cloud wins in the last year as well as our dramatically reduced project implementation timelines.
Our subscription business model allows us to generate rapid cloud services revenue during the implementation phase and product revenue begins as soon as the project is live. The cloud subscription revenue then continues to increase over time in line with continued adoption and direct written premium volume. We did see a decline in our UK business which is affected by the macroeconomic pressures that our customers are facing relating to the overall business environment in Brexit.
Many organizations have been forced to hold any business decision, pending final resolution, they are doing parallel work to consider new business strategy models. In addition, we have seen many executive level changes and a series of associated existing investment and program reevaluations. This quarter, we were very pleased that our single largest customer completed the initial of the project implementation and have moved into production with their new system. Unfortunately, the one-time financial impact in the quarter limited cloud implementation services and minimum subscription revenue. This impact will not have the same effect in Q3 as the system goes into production and we begin generating cloud subscription revenue from this relationship.
As part of our ongoing evolution, we have been able to do a great job optimizing our overall companywide resources to better align to our long-term business needs, again this created some one-time costs that will be covered over the full year. Our Q2 financials reflect some one-time timing and business transition issues, but do not reflect any fundamental concerns in our business or future projections. In fact, we feel strongly that our long-term growth strategy is aligned to the market and customer opportunity. It is clearly reflected in our backlog growth, and while this can sometimes put pressure on weighted growth in margin, we are well positioned to accelerate in both areas in the coming quarters.
As I mentioned, we are very pleased with new sales in Q2 and our 12-month backlog is now at a record $100 million plus. It was an excellent mix of Tier 1 customers, division within Tier 1 companies as well as Tier 3 customers. It include deals from various critical lines of business and new greenfield opportunity. In addition, we had several renewals that included conversions from our on-premise product to our latest cloud versions. The deal span the portfolio across P&C, L&A and Digital1st. This absolutely aligned to our strategy and the overall market trends that we are seeing. We are extremely excited about our second half deal pipeline and have some significant new business moving nicely toward final stages of execution.
In fact, we had a new Tier 1 customer signed with us, just last week to be their new global standard. For more details on recent wins with companies like A.M., SECURA, Stillwater and Burns & Wilcox you can review our latest press releases that can be found on our website. In Q2 we had nine customers go live, this included a Tier 3 customer, who did a complete transformation using the entire Majesco cloud suite for their P&C business. We also went live with one of the largest privately held third-party administrators with Majesco cloud policy and billing.
Lastly, we had an existing Tier 1 customer add six new lines of business to their Majesco cloud policy system, other recent press highlights -- our recent projects with CCMSI, Procam [Phonetic], SECURA, and Arch Insurance, and those press releases can be found on our website as well. Other major highlights in the quarter include, we announced the general availability of the version seven for the market leading Majesco P&C Core Suite that includes policy, billing and claims for P&C, 11 -- excuse me Version 11 and Majesco L&A and Group suite including policy billing and claims for L&A and Group. Additional information can be seen on our recent press releases regarding Version 11 as well as extensive content and video on our website and the Majesco YouTube channel.
We announced for the second year in a row that we have been named a leader in the Gartner's September 2019 Magic Quadrant for P&C Core Insurance Platforms. In fact, if you compare the year-over-year results we had the most positive increase and now the margin of differential between the top three solutions has narrowed dramatically. Again much more material is available on our website and the Majesco YouTube channel.
We also announced that Majesco's cloud L&A and Group suite have been positioned as visionary in the Gartner August 2019 Magic Quadrant for Life Insurance Policy Administrative System. This is a great validation of our investments and execution over the last several quarters and we look forward to even more progress in the coming years.
Finally, last week we announced the availability of the Majesco cloud solutions in a Microsoft Azure marketplace. Majesco cloud insurer, and Majesco Digital1st Insurance were architected to benefit from the cloud capabilities of Azure. This announcement expands good relationship, by having the products and solutions as well as the cloud native Digital1st available in the Azure marketplace. Additional information can also be found in recent press. Given their brand and cloud focus this was a natural synergy and opportunity for us.
It has been an incredibly busy quarter for the company and we have seen excellent progress across our product, delivery and sales teams. Our strategy is include completely aligned to the market and is resonating with our customers and with our prospects. Our product development execution is in high gear [Phonetic] as reflected not only by our V-11 release, but the industry analysts recognition.
Our delivery teams are completely focused on speed to market as reflected by the number of go-lives within the quarter and our sales team have been executing very well for the fourth consecutive quarter. I feel good about the market opportunity are ever improving execution, which allows us to capture market share and growth.
And with that, I'll turn the call over to Wayne.
Wayne Locke -- Chief Financial Officer
Thank you, Adam and good evening to everyone. The second quarter of fiscal 2020 continue that transition through a product focused company and I'm pleased to summarize our financial results. We continue to experience positive revenue and profitability trend across key performance metrics of the business. Revenue for the second quarter from cloud-based customers was 38.5% of the total revenue for the quarter. Revenue for the six months ended September 30, 2019 from cloud-based customers, was up 37.8% of the total revenue for the six months.
Total number of cloud customers is now 61. Cloud subscription revenue for the second quarter grew 21.1% year-over-year and 26.7% for the six months ended September 30th year-over-year. As a percentage of revenue, the cloud subscription stood at 15.1% in Q2 fiscal 2020 compared to 12.4% in Q2 last year. Majesco's 12 month order backlog as of September 30, 2019 was $100 million -- $100.4 million up 37% from $73.3 million on September 30, 2018. We added three new clients organically for the quarter ended September 30, 2019.
Now for some specifics on the financials for the second quarter fiscal year 2020. First, the revenue details. Revenue for the second quarter ended September 30, 2019 with $34.1 million, down 0.8% year-over-year. The decrease in revenue was primarily due to decline in L&A of about [Phonetic] $2.5 million, which was impacted by professional services on the go-live of a significant customer. Revenue was also impacted by approximately $1 million in the U.K. as a result of the slowdown of customers due to economic uncertainty -- uncertainty from Brexit, but was offset through an increase in P&C revenue of about $2.1 million and revenue from exact [Phonetic] of approximately 900,000.
Revenue for the six months ended September 30, 2019 is $71.4 million, up 4.5% year-over-year. Total cloud revenue for the second quarter of fiscal 2020 was $13.1 million, representing 38.5% of total revenue as compared to $13.3 million, representing 38.8% of revenue during the same period last year. Total cloud revenue for the six months ended September 30, 2019 was $27 million, representing 37.8% of total revenue as compared to $25.5 million, representing 37.3% of revenue during the same period last year and is up 5.9% of the same period last fiscal year. Increases in cloud revenue across many of our cloud customers, will offset the reduction in cloud services revenue from the go-live of a large customers.
Cloud subscription revenue grew 21.1% from $4.2 million in the second quarter of fiscal 2019, to $5.1 million in the second quarter of fiscal 2020. As a percentage of revenue, cloud subscription was 15.1% in Q2 fiscal 2020 compared to 12.4% in Q2 last year. Cloud subscription grew 26.7% from $7.5 million in the six months ended September 30, 2018 the $9.5 million in the six months ended September 30, 2019. As a percentage of revenue cloud subscription was 13.3% in the six months ended September 30, 2019, compared to 11% in the same period last year.
Total recurring revenue was $12.9 million for Q2 fiscal 2020, which increased by 20.6% year-over-year representing 37.7% of total revenue in Q2 fiscal 2020 as compared to $10.7 million, representing 31.1% for Q2 of fiscal 2019. Total recurring revenue was $25 million for the six months ended September 30, 2019, which increased 25.6% year-over-year representing 35% -- representing 35% of total revenues for the six months ended September 30, 2019 as compared to $19.9 million representing a 29.1% for six month ended September 30, 2018.
Our geographic mix of revenue was relatively consistent as North America, EMEA, and APAC represented 89.6%, 4.7% and 5.7% respectively for Q2, 2020 and 89.3%, 4.9%% and 5.8% respectively for Q2 2019. In terms of business split, P&C represented 78.6%; life and annuity represented 20.9%; and non-insurance with 0.5% of our Q2, 2020 total revenue and 71.3%, 28.1% and 0.6% respectively for Q2 2019. In terms of client concentration, our top customer this quarter represented 4.9% of revenue, while the top five constituted 20.5% and the top 10 constituted 35.6% of the Q2, 2020 total revenue and 30.9%, 31.6% and 45.1% respectively for Q2. 2019.
Turning to profitability and other expenses. During the second quarter ended September 30, 2019, gross margins were 46.1% compared to 50.4% in the quarter ended September 30, 2018. The year-over-year decrease in margin was primarily due to salary increases and lower margins from our UK and APAC businesses. During the six months ended September 30, 2019, gross margins were 49.8% as compared to 48.7% in the six months ended September 30, 2018.
SG&A for the second quarter of fiscal 2020 was $9.9 million compared to $9.9 million for the second quarter of fiscal 2019. SG&A for the six months ended September 30, 2019 was $21.7 million compared to $19.2 million for the six months ended September 30, 2018. This increase in SG&A was driven by inclusion of the exact business and one-time costs in the first quarter related to our convergence conference, Investor Day at NASDAQ's rebranding and other non-recurring professional fees.
Product development expenses for the second quarter of 2020 was lower at $4.5 million as compared to $4.7 million for the second quarter 2019. However, this is in line as a percentage of revenue year-over-year as we continue to enhance our cloud and digital offerings. Product development expense for six months ended September 30, 2019 was $9.9 million as compared to $9.5 million for the six months ended September 30, 2018. The decrease in lower R&D was primarily driven by the completion of Phase 1 for our top line.
Adjusted EBITDA for the second quarter ended September 30, 2019 was $3.1 million or 9.2% of revenue as compared to an adjusted EBITDA of $4.3 million or 12.5% during the second quarter ended September 30, 2018. This decrease is directly related to lower revenue. Adjusted EBITDA for the six months ended September 30, 2019 increased to $7.9 million or 11% of revenue as compared to an adjusted EBITDA of $7.8 million or $11.4 million during the six months ended September 30, 2018.
Net income for Q2 fiscal year 2020 was $0.9 million or $0.02 per diluted share as compared to net income of $2.7 million or $0.07 per diluted share in the same period last year. Net income for the six months ended September 30, 2019 decreased to $2.2 million or $0.05 per diluted share as compared to net income of $3.7 million or $0.10 cents per diluted share in the same period last year.
Majesco's balance sheet at September 30 continues to reflect a debt free company. The company continues to generate cash, sufficient for fund operations with total cash, cash equivalent and short-term investment at $34.9 million as of September 30, 2019 compared to a total cash, cash equivalents and short-term investments of $15.1 million at September 30, 2018. Our cash balance provides us with significant flexibility to invest in growth producing opportunities.
DSOs was at 102 days at September 30, 2019 due to large go live milestone billing, strong bookings milestone bill. Strong bookings in the second quarter ended September 30, 2019 reflected the continued momentum in the business. The 12-month executable order backlog increased 37.4% to $100.4 million compared to $73.3 million at September 30, 2018. Operationally, we are focused on effectively managing resources to ensure client projects are probably fair while still investing in products and innovation.
As of September 30 2019, our total headcount was 2,505, which is a decrease of 177 from our March the 31, 2019 headcount of 2,682. Overall the quarter and year-to-date financial results demonstrated strong results across all key metrics, including revenue growth in key product lines, customer acquisition, cloud-based metrics, margin expansion, order backlog growth and positive operating cash flow.
I'll now pass it back to the operator to open the call for questions. Thank you very much and we appreciate your continued interest in Majesco.
Questions and Answers:
Operator
Certainly, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Howard Brous with Wellington Shields. Please go ahead, sir.
Howard Brous -- Wellington Shields -- Analyst
Thank you, Adam, Wayne. I just have two questions, one what continues to drive the increase in cloud revenue? And secondly, when is your largest customer going to be -- going live?
Adam Elster -- Chief Executive Officer
Sure, Howard -- thanks Howard. How are you doing today?
Howard Brous -- Wellington Shields -- Analyst
Pretty good. How are you doing, Adam?
Adam Elster -- Chief Executive Officer
Absolutely, good.
Howard Brous -- Wellington Shields -- Analyst
You also working hard.
Adam Elster -- Chief Executive Officer
Yes, well, I would tell you the number one thing that's driving the increase in cloud revenue is, has everything to do with our increase in new customers and deals over the last year and then the project go lives. So as you guys know our business model, as we sign of new customers in the last year. All but one of the deals we did last fiscal year were cloud deals. The implementation started in the back half of the year and we're now starting to see that revenue as these customers are going live.
So the mix of -- the number of customers in our cloud revenue is increasing. We have more and more of our customers, who are going live and that overall mix and the number of the go lives is seeing that increase in the overall cloud revenue. As far as our largest customer, we completed the project and with all large projects, there is generally an extended period of testing in pre-production until they go live, but we anticipate that in the near term, but the good news for our business model is we were able to see an increase in our cloud revenue despite not having that single customer. So with a much healthier mix of customers in the cloud revenue this quarter.
Howard Brous -- Wellington Shields -- Analyst
Can you just be a little bit more granular in terms of that customer? Do you think by the end of the year or certainly calendar first quarter next year.
Adam Elster -- Chief Executive Officer
I think that's a realistic expectation.
Howard Brous -- Wellington Shields -- Analyst
Adam, best. Wayne best. Thank you again. That's all I have.
Adam Elster -- Chief Executive Officer
Thank you, Howard for your support.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Adam Elster for any closing remarks.
Adam Elster -- Chief Executive Officer
Thank you very much. We appreciate the interest in Majesco and you'll see that quite a number of the material related that I discussed today related to new customers and go live. We've published press releases related to those customers, so if you're interested in seeing more material on new customer wins. I'd urge you to check out our website. There's a number of press releases, which has the specifics on the company's and their information.
And lastly, there is a lot of information as well as related to go live and we've produced a ton of new material in our Majesco YouTube channel. So if you're interested in some video there's content there. Thanks for your support and look forward to talk you soon. Thank you very much.
Operator
[Operator Closing Remarks]
Duration: 23 minutes
Call participants:
Andrew Berger -- Investor Relations Officer
Adam Elster -- Chief Executive Officer
Wayne Locke -- Chief Financial Officer
Howard Brous -- Wellington Shields -- Analyst
