Systems Limited (SYS) Earnings Call Transcript

Okay. Given that the North American market operates at higher margins than other regions, should we expect a positive impact on the consolidated margins going forward as the contribution from North America increases or your revenue mix gets more tilted towards North American markets?

I think we want to do that as well. I think North American market is a big one. And it's attractive. The margins are better if we're directly selling it to the customer. So definitely -- but it will take -- it's not like, again, I said, like we're just integrating it. We need to -- there are synergies that needs to be combined and it takes a little bit of time when you acquire an entity, it merge culture, everything. So it will happen, but it may take a little bit of time in the quarter 3, quarter 4 time frame.

So you have -- I was also seeing this in the presentation, and there's a question around that. You flagged M&A as a priority, what size of acquisitions are you targeting? And in which geographies or capabilities? Because you've specifically mentioned that the cash flows now from these transactions on the core side is increasing, so you have a greater opportunity around that. If you can elaborate on that.

Yes, that is our priority in this current time frame, where there is a disruption in regional disruption as well as the AI disruption and gaining the momentum in the Europe and North American side, we need to double down that journey of acquisition because from a diversification perspective, we totally believe that with AI being the level playing field and with infrastructure and everything what is coming in Pakistan, resource, talent, everything is there, and we have the base. We have the base. So we can definitely double down on these acquisitions, and we are working aggressively on those. So while we are working and pushing. But I think we are not that company. We truly believe that it's -- we do not want to show just the growth by having an inorganic growth. Acquisition growth is a separate target. We have to grow organically in our own business and the inorganic business has to be on top. That's how our business model is. So if we don't do M&A, say, for example, if you don't find anything, it doesn't mean that we stop growing because we didn't do M&A, right? So that's not our business model. M&A has to be on top, and this is our target. This is our KPIs that it has to be over and above the growth that what we do it organically with our business, what we have. But yes, that's a priority, and that will remain the priority because this is an ideal time to double down on those geographies where we are weak or we don't have a strong footing like Europe and America and U.K. And the market size is huge, like even if we get like 0.001%, it will be huge.

Asif, given how the neighbor operates next door, they -- there's a culture of M&A, I think, all throughout. So -- we've seen off-late that you guys have done 2 acquisitions. And previously, there was one before. So should we expect the frequency of these transactions would increase now that you've gotten 3 or 4 on board? Or it would...

It depends on the size of the transaction. It depends on the size of the transaction. If there are smaller transactions, then yes, there could be many. But if there are larger transaction, then it cannot be many because we have to digest, integrate and grow, right? So it all depends that whether it's a tuck-in acquisition or it's a good acquisition.

Okay. There is another question, will AI drive automation -- will AI-driven automation lead to margin expansion? Or do you expect increased pricing pressure from clients as AI improves delivery efficiency?

Both ways, it's a double-edge short, right? So if you have signed an outcome-based project, which is a fixed price and if you use AI effectively, you can make -- if your GP margin plan was 20%, it could jump to 50%, right, or 40%. But on the other side, if you are just on a time and material basis, then, of course, customer can say that why wouldn't you do this by sort of 5 people, will do with the 4 people. And when you do that, it's simply, as you rightly said, then you can't just say that, okay, I will fire one person without increasing the rate and you increase the rate because AI also has a cost. AI is not free. When we are integrating AI into our mix, there is a cost for tokens. And token maxing or token cost also needs to be passed on to the customers as well. So this efficiency doesn't come without the cost. People under-think that AI is a magic without any cost. Actually, AI also has a cost. And we -- so that's why the cost customer has to absorb. So it doesn't affect too much on the margin dilution. But of course, so that's why -- now there are 3 business models, which is emerging nowadays. Customers are not saying that, okay. And why I'm saying that it's an exciting time, right, because when the contract ends, there are big Indian companies or neighboring countries, they have, say, for example, or Philippines or whatever, they have 3 years of 5 years of contract signed with the customer. Now customer is waiting for that contract to end and the RFP gets released in the market. It's like, I can say, 8 out of 10, this is a trend. And customer, CFO wants to reduce the price. He was saying a $1, he wants to pay $0.80 on $1 now. That gives an [indiscernible] participate at least and show that efficiency, right, through that. So I think that's mix behavior, I would say. And that's what we are waiting and enjoying and we are participating more. That's why more RFPs are coming. Because as soon as the contract ends, RFPs in the market, right? And you have to compete on price, you have to compete on AI, you have to compete on efficiency. And now customer is not asking, okay, give me 10 people. They're saying, okay, this is my scope of work, give me the price, right? So here, you have a play. And I think it's a big play, right? So I think that's -- the business model is shifting, and we are working to [indiscernible].

Okay. Asif, if -- there is a question, Indian rupee is depreciating, whereas PKR is stable. And I was looking at the Indian rupee on the chart just a while ago, it was INR 81 to $1 around -- in 2025, it was INR 84 to $1, roughly around 12%, 13% of depreciation. While on the flip side, we have appreciated of late. So how big a pain is that in sourcing new contracts?

It's a pain on the -- it's not a new contract. New contract, we always make it, right? Because we price it accordingly, we use AI. We do all of these things. New contracts, I'm not worried. But of course, on an existing contracts, the cost has gone up and the rupee appreciates, of course, it's a painful process because customer is not going to increase the price by 12%. It's not happening, right? It's very hard to justify that in today's day and age. So I think eventually, it's not our story for export. I think our margins are still in double digits. There are other exporters in the country, their margins are in single digits. And when they're operating in a single-digit and currency keep appreciating, their margin will evaporate, right? So I think -- I'm really hoping that sense will prevail and at least we will keep at least doing some rational thinking [indiscernible] painful process. And if it continues to go in that direction, it will be further painful. There is no 2 thoughts about it. It's very simple. One will make a huge difference, even just PKR 1 devaluation or appreciation makes a huge difference on our profitability, right, on revenue as well as exchange losses or exchange gain. So I think we have seen that we have been 2.5 years roughly of appreciation cycle. I [indiscernible] that maybe 6 more months of a painful time, then eventually things will ease out.

Okay. There's a question from Nasheed. He is asking, there's a company called Cognition AI that has an AI-based software developer called Devin AI, what impact will tools like this have on human software developers and IP outsourcing from [indiscernible]?

I think as I illustrated earlier, the custom application development for SME business is gone. That sector is gone. It's a Claude and Cognition AI. There are so many tools, right, Claude code and all of these things, Cursors and everything. It's coding is -- building a customer application is very easy now, right? So anyone can do it. So -- and for small companies, for larger organization where we operate enterprise systems, that's not easy because they have so many disparate systems. They have ERPs, they have core banking. So here that [indiscernible] we operate, there is still a lot -- it's not like these tools will do it. If you want to create a mobile app, you want to create an e-commerce up, you want to create a website, you want to create a content, that is very easy. That's what we don't do now, right? We used to do it. But 2, 3 years, it took us to shift away from custom application development. Our custom application development portfolio is probably less than 10%, right? So -- and in custom application development, we do very complex work. So it's not like you just give a prompt and right, yes, you can create a small company or [indiscernible] company software using these things, but it's not like for enterprises don't operate so far. And I don't see it's operating or changing because every principle is changing and bringing those tools in their tool set. So we have to use those tools and implement and keep doing. So this is a cycle, I think when -- I can give you 10 examples, right? When the e-commerce came in, everybody was saying retailers are done. There will be no retail stores left. So it's -- this is -- I have seen 10 transformation, but this is a big one. And if we catch it, as I said, it would be great. If you don't catch it, you are done. That's what I say that to my people as well, you are either beginning of your career or you are at the end of your career. So you choose where you want to be?

Okay. Retail and CPG is described at the highest growth segment due to the Confiz merger. What is the organic growth rate of retail and CPG, excluding the acquisition effect?

No, we didn't directly -- before our acquisition, we were not very active in our -- sorry, retail CPG sector. It was our associated company in the U.S. that they were doing a lot in retail CPG and we were just doing the delivery. So now we have direct customer acquisition for retail CPG, right? So that is a lot different than what we used to do. So we see a lot of opportunities. And again, with the BAT acquisition for GBS, we are now pitching that services to our clients as well. So we are doing a lot of reorg to make sure that we penetrate into those accounts where they are just doing one thing and with Systems being the large company, we can do 10 other things in the similar accounts. So that is the synergy and that's why we acquire. We don't acquire for revenue, right? Revenue is like you can say, 5% or 20%, it doesn't matter actually. What it matter is the clientele, right? That if you're doing $1 in a customer, can you do $5 or $10 in a customer in a 1-year time frame, right? That is a game changer. If you don't do it, then $1 is $1, it doesn't matter, right? So when we are acquiring a company, we are not looking at revenue numbers or profit numbers, it's the future potential and what we are getting because we need customers. We need enterprise customers where like these AIs can be the game changer versus AI can be the threat, right? That -- so I think that's the strategy, and that's -- I'm very clear on that and very bullish on that as well. But of course, things -- it's a time that it takes to have a launch because it's -- everything is a natural progression, and that's what we are working towards it.

Okay. On a lighter note, I think somebody has seen you yesterday on the local media with the PM. And here, the question is, how was your meeting with the PM? What are some of the suggestions you gave and budget relief you are expecting for the company in sector? So you've got an already more famous [indiscernible].

I think I will -- No, I think I will just -- I think it's a good sign that current government and the PM meets with the business community and hear the suggestion pre-budget versus the post budget, which is good news, at least listening and changing a little bit based on the feedback and input is a good sign as doing it afterwards, right? So I will just stick to my -- our sector. There are a lot of things. But definitely, if you follow Systems, we have FDR regime of 0.25%, which is going to be expired in June 2026. So definitely, we want discontinuation. And because, as you can see, the export numbers are increasing, and that is one of the factor that is very important that needs to continue. And I'm very, very positive that it's going to be continued for a good amount of time in the future as well. So that is -- was one suggestion or one thing. There is, of course, a couple of other remote worker versus the taxation and the corporate sector has been discussed as well. There is -- if you guys are following export sector, there is an ERF limit extension by the government. My request is that IT sector needs to get those ERF limits as well because it's a 6% arbitrage on the rate, and we can definitely benefit from buying acquisitions. And if the capital cost is on the lower side in the rupees, I think we can definitely benefit because 6%, 7% versus 13% or whatever, it's a good delta. And also, if you guys know, we have that rule that we can -- if we want to do an acquisition abroad, we can take 50% of our export proceeds without State Bank approval. So if we have ERF and we have that kind of a leverage the growth can be explosive because we need capital to grow. So I think that was the capital allocation, capital formation. And then there are many other -- these were the 3 top, but I have many other suggestions as well in terms of AI, data center, AI sovereign economy. A lot of things Pakistan needs to create, their own AI model, defense tech. There's tons of idea, but these were the 3, 4 main things.

Okay. Can you please share how many new enterprise client systems added from the acquisition of Confiz and BAT?

At least, I would say, many, but at least I would say a good 8 to 10.

Okay. And I think BAT you just acquired for the Pakistan geography, right? So are you guys...

No, but we are doing a global work.

But obviously, the other areas were acquired, I think, by Accenture. They bought up most of the business. So the idea is that is that acquisition -- Confiz has already been discussed at length, the BAT acquisition, is it allowing you to spread your arms or some details on that side, if that's possible?

I think, yes, first 6 months, we wanted to make sure that there is a lot of inflows coming in. So we want to absorb that inflow. And I think if you guys are following us on the social media, I personally went to the Shared Services conference, SSON, the largest shared services conference, where the GBS, this type of business happened. We attended first time because we didn't have that expertise before. So we had the booth and we had got on leads and opportunities because now we can showcase ourselves. So it's a new business development which I believe we can sell it in our existing customers, and we have a good story to tell now or a good reference as well, not just a story and good people and good case study that we are doing this kind of work from Pakistan. So unfortunately, people in the world doesn't know that Pakistan does these type of things, which is the poor branding and marketing as a country we always do. So Systems, and we are trying to lead that way and make sure we tell people and our customers that this kind of work also happened in Pakistan. So I met with so many people who does the location strategies, and the consultants who do the consultant and invite parties to the RFP process. So registered Pakistan as a country for operation resilience and also Systems as one of the service provider because that is really important. So ground work needs to be done to build all of this, right? It doesn't happen by accident. So you have to build the base, you have to tell people. So we are in that marketing mode. So as I said, like it's not a -- it's -- everything takes its time, but at least we are in the race now. We were not in the race. So we are in the race. So we will win a few, I am positive, may not be like yesterday, but we will.

Okay. Can you share the reason for continued increase in trade debts and how much percentage is from the UAE market?

UAE market is very stable. In the quarter one, we wouldn't have much of a surprising trade debts. Although we had some KSA, where there was definitely a slowdown on the collections, but we are catching up a lot in the quarter 2. And it will be slowed down. There is no doubt in the region. When these things happen, the cash flow people hold and it's not us, it's everyone. If you get a steady, the company -- but again, their portion in the Middle East is very low. So you might not be able to compare like-for-like. But definitely, it is -- if it prolongs, the current contract prolongs, then of course, there will be some DSO impact for sure. Not drastic, but there will be some.

In terms of [indiscernible], I think we'll go for the last question. Systems, CBS has been launched, targeting [indiscernible] marketing and HR processes, what is the initial pipeline target markets and the breakeven timeline for this new brand?

[indiscernible], we are already -- so we -- it's not [indiscernible]. It's already a very good business, right? So we are already cash positive and profitable. So it's not a question of breakeven. We are much ahead of that. Branding, yes, we need to get more business that you can say. And in the question, if I understand correctly, the pipeline, as I said, that's what we have launched the brand in this conference. We are building the pipeline. It takes time to close because these are the large deals. These are not small deals like a 10 people deal. If it happens, it happens, like 500,000, 600,000 people deal, right? So when it happens, it happens. So we expect like 1 or 2 deals, but it has to be thousand-odd people or 500-odd people deals, right? It's a deal size is bigger when it happens. So it takes time to close those deals. Deal flow is going -- has started. But when it comes, it's big, that's what I'm trying to say, because it's not like 5 people development shop, nobody operates the GBS for 5, 10 people, right? GBS happens to hundreds of people, right? So scale comes very quickly. But the cycle of closure is also lengthy, that's why.

Okay. I think there is one last question, but you always tend to skip on that. 9,000 employees, what will be the employee growth rate going forward?

I think now you should not ask that question. That's an obsolete question. Now in AI, you have to ask different questions. How many people you will reduce and make more money, right?

Okay. And one last question from me is, basically, we have seen these issues and there are talks on Middle East, UAE markets in specific and people have been really dialing on that. But certainly, there are visa issues. UAE continues to be one of the important market for Systems as well. And on the flip side, also, we have recently signed a mutual defense agreement with Saudis. So is there a positive impact or bearing of that agreement or additional business flow that you think will come through because of that? And are you seeing the negative downside of the visa issues on the business in the UAE or you are getting it compensated through other geographies or talent pool from other regions like the Egypt market or that can serve that? So a last comment, and then we will close on time.

Yes, yes. I think very good question. I would say it's a very, very thoughtful question because that's what the people dependent and the visa dependence. When you are doing services business, you need people on the ground. But let me give you a color on that. Okay. Saudi definitely with the defense pack and you guys know -- everybody knows, world knows that relationship between 2 countries is getting better and better. And hopefully, we will see more, not just the MOUs but real work happening soon in the country with bilateral, government to government, defense tech to AI innovation hubs and a lot of things are going to happen. And we will be a beneficiary of this because being the largest IT company and the largest IT Pakistani company in Saudi as well, we will be the beneficiary. And similarly, in Qatar also a lot of positive momentum. A lot, right? I can say that. And also now a little bit of Kuwait opening up as well. And over there, the competition is less because not everyone used to go there. So there are positives. And of course, now I come to UAE, which is our largest market from a segment perspective. As I said, we are grateful so far, none of [indiscernible] strategic and large customers, none of our customers has shown any change in their behavior or in the work pattern and so on and so forth. Yes, the new deal signature is a little bit slower. From a people perspective, our Middle Eastern entity is truly multinational entity. So if you believe that we have 100% of the people are Pakistani origin. That is not true. 52% of workforce is Pakistani only. It's not like 100%. So we have 48% of our workforce, even today, is multinational, right? So we are not losing business because we cannot send people from Pakistan due to visa issues. Fortunately or unfortunately, there are layoffs in neighboring countries as well. And we're getting good people from everywhere, right? And people are still open to come to work in Dubai as well, right? And so it's not like completely bleak. So we have uncovered, and I'm glad that at least our -- we have like 1,000 people, say, for example, we have like 52% and now 48%, and that ratio is going to change as if our visa regime has tightened for a few more months. So we are not one of those companies. We try to navigate. We know how to navigate. And I'm very -- my team has done a phenomenal job in navigating that crisis by managing and recruiting people from various geographies. So talent is not an issue anymore, which was my threat a few months or few weeks ago or a few years ago that where I was mentioning that visa could be the game changer. But yes, it affects us, but it's not like killing us, right? So we are progressing in the direction, and I'm very positive that will not affect the business flow. We will continue to do demand generation. We are very bullish on that. And we want to position ourselves as a truly global Pakistani multinational, right? So we're not positioning ourselves as like just Pakistani company. We are proud multinational, right? So where we recruit people, we do business with the countries in the world, in the 4 continents, and that's our -- that's going to be the mission going forward.

Okay. On this positive note on this positive side of the visa issues not having an impact on the workforce that you employ in different geographies, in fact, that is coming out as an opportunity to truly develop a multinational employee workforce. We will call it close to the session. Thank you, everyone, for joining us for this enlightening session in the wake of the geopolitical turmoil. Thank you, Systems Limited. Thank you, Roohi. Thank you, Asif. Thank you, Tahir. And thank you, everybody else. If you have any follow-up questions, please feel free to reach out to Insight Securities or Systems Limited for that matter, and we will be happy to assist you. Thank you so much.

Thank you, everyone. Thank you, Zubair.

Thank you.

Sure, thank you. Thank you. Thank you. Thank you. Bye.