Aeries Technology: Driving Digital Transformation Through Global Capability Centers

Overview Aeries Technology is a global provider of professional and management services, specializing in establishing and managing “Global Capability Centers” (GCCs) for private equity firms and mid-market enterprises. Aeries’ engagement models are designed to provide deep vertical expertise, functional know-how, and digital solutions to help clients scale, optimize, and transform their business operations. By leveraging AI, implementing process improvements, and recruiting talent in cost-effective locations, Aeries aims to deliver significant cost savings to its clients.

Aeries supports its clients’ global growth by providing professional advisory services and operations management to build and manage GCCs in suitable and cost-effective locations. These GCCs are designed to act as seamless extensions of the client organization, providing access to top-tier resources and enabling clients to remain competitive, achieve cost efficiencies, and drive operational excellence.

A key aspect of Aeries’ service is its focus on digital transformation. The company leverages cutting-edge technologies, including AI, to drive innovation and streamline operations, enhancing decision-making, automating processes, and delivering substantial business value to its clients.

Aeries’ clients use its services to manage various organizational operations, including software development, IT, data analytics, cybersecurity, finance, HR, and customer service. Aeries hires and deploys appropriate talent on its clients’ behalf, providing them with the opportunity for promotion, recognition, and career progression, which helps maintain high employee satisfaction and low voluntary attrition rates.

Recent Developments In 2023, Aeries completed a business combination transaction, which provided the company with approximately $8.7 million in cash. The company also entered into several private placement agreements, raising additional funds to support its operations and growth initiatives.

Key Factors Affecting Performance and Comparability Aeries’ performance is influenced by several factors, including the market opportunity, private market dynamics, macroeconomic conditions, customer retention, and income taxes.

Market Opportunity: Aeries is focused on the private equity ecosystem and mid-market enterprises in North America, Asia Pacific, and the Middle East, with a primary focus on the United States. Companies are seeking service providers with the experience and expertise to provide the right-sized solution and lead them through their digital transformation journey.

Private Markets: As the private market landscape evolves, Aeries’ service offerings will adapt to align with the shifting dynamics of potential investors and portfolio companies. Economic conditions, particularly in the private equity markets, can impact overall investment activity and growth momentum.

Macroeconomic Headwinds: Aeries’ operational performance is influenced by prevailing economic conditions, including concerns over wage inflation, decelerating global growth, and currency exchange rate volatility.

Customer Retention and Early Termination of Long-Term Contracts: Maintaining long-term customer relationships is crucial, as a significant portion of Aeries’ revenue is derived from these contracts. While the company has contractual provisions to provide some financial protection, the termination of key customer agreements can negatively impact its operational results and financial condition.

Income Taxes: Aeries’ effective tax rate varies based on the geographical sources of its earnings, tax rates in different jurisdictions, and tax planning strategies.

Financing Costs: Aeries regularly evaluates its debt obligations and uses short and long-term debt to finance its working capital requirements, capital expenditures, and other investments. Changes in prevailing interest rates can affect the company’s financing costs.

Results of Operations Overview Aeries has one operating segment and presents its revenues by client location, with substantially all of its North American revenue relating to business with clients in the United States. The company’s revenues are primarily earned in U.S. dollars, while its costs are primarily incurred in Indian rupees, U.S. dollars, and Mexican pesos, exposing it to risks from inflation and currency exchange rate fluctuations.

Comparison of the Year Ended March 31, 2024, and March 31, 2023 Revenue, net: Revenue, net for the year ended March 31, 2024, was $72.5 million, a 37% increase compared to $53.1 million in the prior year. This change was attributable to a $18.3 million increase in revenues from new clients and a $1.1 million increase from the ramp-up of existing clients.

Cost of Revenue: Cost of revenue for the year ended March 31, 2024, was $50.9 million, a 29% increase compared to $39.4 million in the prior year. The primary drivers of the increase include higher compensation and benefit expenses, fees of external consultants, and rent and professional charges, partially offset by a decrease in recruitment-related expenses.

Gross Profit: Gross profit for the year ended March 31, 2024, was $21.6 million, a 58% increase compared to $13.7 million in the prior year. This increase was primarily driven by the $19.4 million increase in revenue, partially offset by the $11.4 million increase in cost of revenue.

Gross Profit Margin: Gross profit margin for the year ended March 31, 2024, was 30%, an increase of 413 basis points compared to 26% in the prior year. The improvement is primarily attributed to higher business volumes from the project-based consulting business, which typically generates higher margins.

Selling, General and Administrative Expenses: Selling and administrative expenses for the year ended March 31, 2024, were $18.7 million, a 65% increase compared to $11.3 million in the prior year. The increase was due to higher legal and professional expenses, expected credit loss expense, and increased operations costs, partially offset by a reduction in ESOP-related expenses.

Total Other Income, Net: Total other income, net for the year ended March 31, 2024, was $16.1 million, a significant increase compared to $0.4 million in the prior year. The increase was primarily driven by a $16.2 million gain resulting from the change in fair value of derivative liabilities.

Income Tax Expense: Provision for income taxes for the year ended March 31, 2024, was $1.9 million, a 77% increase compared to $1.1 million in the prior year. The increase was primarily due to the significant rise in pre-tax income and higher non-deductible expenses.

Non-GAAP Financial Measures Adjusted EBITDA and Adjusted EBITDA Margin Aeries uses Adjusted EBITDA and Adjusted EBITDA margin as non-GAAP financial measures to provide additional information and insight into its operating performance. Adjusted EBITDA is defined as net income from operations before interest, income taxes, depreciation and amortization, further adjusted to exclude stock-based compensation, business combination-related costs, and changes in fair value of derivative liabilities.

For the year ended March 31, 2024, Aeries reported Adjusted EBITDA of $9.2 million, representing an Adjusted EBITDA margin of 12.7%. This compares to Adjusted EBITDA of $8.7 million and an Adjusted EBITDA margin of 16.4% in the prior year.

Liquidity and Capital Resources As of March 31, 2024, Aeries had $2.1 million in cash and cash equivalents. The company acquired approximately $8.7 million in cash shortly following the closing of the business combination transaction.

Aeries’ working capital needs are primarily to finance its payroll and other administrative expenses in advance of receiving accounts receivable, as well as increased expenses due to being a public reporting company. The company’s primary capital requirements include expanding existing operations, financing acquisitions, and enhancing capabilities, including building digital solutions.

Aeries has historically financed its operations and expansions with cash generated from operations, a revolving credit facility, and loans from related parties. Management expects to have sufficient cash from operations, cash reserves, and debt capacity to finance the company’s operations, growth, and expansion plans for the next 12 months and the foreseeable future.

In April 2024, Aeries received net proceeds of $4.68 million by selling 2,261,778 newly issued Class A ordinary shares in a private placement. The company is also in ongoing negotiations to potentially restructure certain liabilities into equity or long-term liabilities.

Cash Flow For the year ended March 31, 2024, net cash used in operating activities was $4.3 million, primarily driven by an increase in accounts receivable. Net cash used in investing activities was $1.7 million, primarily for the purchase of property and equipment and the issuance of loans to affiliates, offset by loan repayments. Net cash provided by financing activities was $7.1 million, primarily from proceeds from the business combination, short-term debt, and long-term debt, partially offset by repayments and transaction costs.

Outlook and Conclusion Aeries’ purpose-built business model aims to create a more flexible and cost-effective talent pool for deployment on clients’ operations, while fostering innovation through strategic alignment and visibility across the organization. The company is committed to delivering best practices and success factors by leveraging its expertise and experience in the industry.

Despite the challenges posed by macroeconomic headwinds and the potential for customer attrition, Aeries has demonstrated strong financial performance, with significant growth in revenue, gross profit, and Adjusted EBITDA. The company’s focus on digital transformation, cost optimization, and strategic partnerships positions it well to continue supporting its clients’ global growth and drive long-term value for its shareholders.