Netweb Technologies India: Q2-25 Earnings Call Highlights
35% FY25 revenue growth target. Confidence in their growth. Robust business pipeline. Successful execution of projects. Increasing demand for their solutions. Expansion into international markets.
netwebindia.com | NSE: NETWEB
1. Key Takeaways
1.1 TLDR
Netweb Technologies expressed strong confidence in their growth trajectory, highlighting a robust business pipeline, successful execution of key projects, and the increasing demand for their solutions, particularly in AI and data center segments.
The commencement of export orders signifies their successful expansion into international markets.
The management reiterated their commitment to a 35% revenue growth target for FY25, supported by a healthy order book and pipeline.
1.2 Operational Highlights:
Strong Financial Performance: Operating revenue grew 96% YoY in H1 FY25, crossing INR 4,000 million. H1 FY25 PAT doubled YoY to INR 412 million. Q2 FY25 operating revenue increased by 73.2% YoY, reaching INR 2,511 million. Operating EBITDA for Q2 FY25 increased by 85.7% YoY to INR 357 million.
New Manufacturing Facility Operational: The state-of-the-art manufacturing facility for high-end computing, servers, storage, and switches is fully functional, enhancing Netweb's production capabilities and supporting the "Make in India" initiative.
Focus on AI: AI is rapidly becoming a significant revenue contributor, growing to 15% of revenue in H1 FY25, a 193% YoY increase.
Export Orders Commenced: Netweb has begun receiving export orders, aligning with their growth strategy to enter overseas markets, particularly the Middle East and Europe.
Robust Business Pipeline: The business pipeline remains strong at INR 3,700 crores, providing confidence for continued growth over the next 2-3 years.
1.3 Key Themes:
Growth Drivers:
Data Center Boom in India: Strong demand for data centers in India is driving growth in private cloud and HCI segments.
AI Adoption: Increasing AI adoption across various sectors is fueling demand for Netweb's AI solutions.
Government Initiatives: Initiatives like the India AI Mission, with a budget of over $1 billion, present substantial opportunities for Netweb.
Operational Updates:
New Facility Capabilities: The new facility is fully functional, enabling end-to-end production of high-end computing systems, including PCB design, manufacturing, and SMT for servers, storage, and switches.
Employee Growth: The employee base has more than doubled since the IPO, reaching 421. Netweb is attracting strong talent and investing in building a robust team.
5G ORAN Solution Development: Development of 5G ORAN solutions is ongoing.
Financial Performance:
EBITDA Margin: Strong EBITDA margins of 14.2% in Q2 FY25 are attributed to a favorable product mix, with the AI segment contributing to higher margins. Management expects EBITDA margins to remain in the 14-14.5% range for FY25.
Cash Conversion Cycle: Cash conversion cycle improved to 100 days in Q2 FY25, down from 129 days in Q1 FY25. Management expects this range to persist due to the nature of the business.
Government vs. Enterprise Clients: Government clients demonstrate slightly better payment cycles compared to enterprise clients. Credit terms are generally 90 days for both segments.
India AI Mission:
Participation Strategy: Netweb will partner with Cloud Service Providers (CSPs) bidding for the initial services empanelment under the AI mission.
Competition: Netweb anticipates competition primarily from multinational companies, not domestic players.
Opportunity Size: The AI mission has a budget exceeding $1 billion planned to be spent over 3-5 years.
Export Market:
Focus Areas: Initial export focus is on the Middle East and Europe.
Product Segments: Private cloud, HCI, and AI solutions are driving export traction.
Margin Profile: Margins from export orders are expected to be similar to domestic orders.
1.4 Key Quotes
On Growth: "Our business pipeline and order book remains strong. We are pleased to report that we have started receiving export orders, and this aligns with our growth strategy to enter the overseas market."
On AI: "AI has rapidly become a pivotal contributor to our revenue, growing its share to 15% in H1 financial year '25, with a remarkable 193% year-on-year increase."
On Cash Conversion Cycle: "So, look, cash conversion cycle, seeing the growth we are undergoing, will be in the range of 100 days only for us."
On EBITDA Margins: "So 14 to 14.5% is the range where the EBITDA margins for FY '25 should lie?"
On India AI Mission: "So basically, India AI mission anyways, this is something which is known to the entire world now, because the government has already announced about it. It's not about just we saying about it. So India AI mission as such is basically a project, which is sizing around more than $1 billion kind of budget they have allocated. And that is also targeted to be spent within a span of three to five years."
Netweb Technologies Q2 FY25 Earnings Call FAQ
1. What is the current status of the government's AI mission and how is Netweb Technologies positioned to benefit from it?
The Indian government's AI mission is progressing well, with the first trench in the form of an RFP already released and expected to close soon. The government is actively working on a larger RFP, expected to be out by Q2 of the next year. Netweb Technologies is well-positioned to benefit from this mission due to its:
Advanced Product Line: Netweb has introduced two generations of AI-focused systems, including ARM architecture-based GPU systems with NVIDIA and AMD-based GPU systems.
Sovereign Cloud Offering: Netweb offers a complete AI sovereign cloud solution, including hardware, cloud stack, and middleware.
Strategic Partnerships: Netweb will be partnering with Cloud Service Providers (CSPs) to provide solutions for the AI mission, further expanding its reach and business opportunities.
2. With the company's rapid growth, is the negative operating cash flow a concern?
The negative operating cash flow is primarily due to the significant growth in revenue, resulting in higher accounts receivable. This is typical for companies experiencing high growth, and the cash flow is expected to improve as growth stabilizes.
Key takeaways:
High growth results in higher accounts receivable, impacting cash flow.
The quality of assets and debtors remains high, ensuring future conversion to cash.
As growth stabilizes, cash flow is expected to improve.
3. What is the expected contribution of the AI business to Netweb's revenue in the future?
While the AI business contributed 15% to H1 FY25 revenue, this is not expected to be the peak. The management anticipates continued growth in the AI segment over the next 2-3 years.
4. How does Netweb Technologies plan to address potential talent acquisition challenges given its rapid employee base expansion?
Netweb Technologies has not experienced talent acquisition challenges post-IPO and has successfully hired the required talent. The company prioritizes attracting and retaining the best talent by offering competitive compensation and creating a future-ready organization.
5. What is the rationale behind the recent promoter stake sale, and are there any plans for further stake dilution?
The recent promoter stake sale was not planned but arose from the interest of strong investors seeking a larger position in the company. The stake sale was limited to 3.6%, and there are no plans for further dilution, either primary or secondary, in the near future.
6. What is the anticipated revenue share of the data centre segment, including HCI and cloud, in the next 2-3 years?
Netweb Technologies expects strong growth in the data centre segment due to the increasing demand for data centres in India. The company's focus on large enterprise customers and its partnership with AMD, offering a complete stack of the latest chipsets, will drive further penetration in this market.
7. What are the utilization levels at the new SMT facility, and how have they impacted EBITDA margins?
Netweb Technologies does not measure its performance based on capacity utilization but rather focuses on capabilities. The new SMT facility is fully functional and operational. The strong EBITDA margins of 14.2% are attributed to a favorable product mix, with the AI segment offering higher margins than the other segments. The EBITDA margin is expected to be in the range of 14-14.5% for FY25.
8. What is the anticipated impact of the Production Linked Incentive (PLI) scheme on Netweb Technologies' margins?
The PLI scheme is expected to have a positive impact on margins in the quarter it is received. However, for the full year, the overall margin profile is expected to remain within the guided range.
Source: Link to Earning Call Transcripts
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