MPHASISNSEQ1FY2023July 22, 2022

MphasiS Limited

9,401words

66turns

14analyst exchanges

1executives

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Management on call

Nitin to begin the proceedings of this call. Thank you and over to you sir. Nitin Rakesh

Thank you, Steven. Good morning, everyone. Thank you for joining our earnings call early this

Key numbers — 40 extracted

90%

est for growth across markets, tech teams and domains. A May 2022 Bain survey indicated that over 90% of U.S. companies expect to increase their IT spend, and this is consistent with what we are seei

22.1%

switch gears and walk you through the performance during this period. Our Q1FY23 revenue presents 22.1% YoY growth in constant currency terms. Direct revenue grew 2.4% sequentially and 28.3% year-over-

2.4%

d. Our Q1FY23 revenue presents 22.1% YoY growth in constant currency terms. Direct revenue grew 2.4% sequentially and 28.3% year-over-year in constant currency terms. Within Direct, our anchor geogr

28.3%

e presents 22.1% YoY growth in constant currency terms. Direct revenue grew 2.4% sequentially and 28.3% year-over-year in constant currency terms. Within Direct, our anchor geography, the U.S. had robu

32%

ar in constant currency terms. Within Direct, our anchor geography, the U.S. had robust growth of 32% year-over-year in the 1st Quarter of FY23 over FY22 in constant currency terms. Our Direct busine

94%

n the 1st Quarter of FY23 over FY22 in constant currency terms. Our Direct business accounted for 94% of revenue in this quarter. DXC’s contribution to revenue is now 4.8%, and given the low and decl

4.8%

irect business accounted for 94% of revenue in this quarter. DXC’s contribution to revenue is now 4.8%, and given the low and declining contribution of DXC’s overall revenue, Direct strong growth more

30%

th regard to geographic growth our anchor geography U.S. has fared well with an overall growth of 30% in constant currency terms. Excluding DXC, the growth numbers are higher at 32%. From a service

41%

32%. From a services perspective, Application service line has been a driver for growth with a 41% growth in Direct apps this quarter, thanks to the secular themes of digitalization and transfor

27%

ased with the continued growth in our anchor vertical, Banking and Financial Services, which grew 27% in constant currency terms despite headwinds in the mortgage LOB. Q1FY23 marks the 8th straight

20%

nt currency terms despite headwinds in the mortgage LOB. Q1FY23 marks the 8th straight quarter of 20%+ YoY revenue growth in BFS. We continue to enjoy market share gains with our key BFS customers.

50%

ustomers. TMT, a focus vertical for us, continues to deliver dividends with Direct TMT growing at 50%+ YoY in constant currency. The TMT segment more than doubled in FY22, with 110% growth in const

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Guidance — 17 items

Nitin Rakesh

opening

“companies expect to increase their IT spend, and this is consistent with what we are seeing and hearing.”

Nitin Rakesh

opening

“We continue to have deal wins and a robust pipeline and will be committed to growth in the region.”

Nitin Rakesh

opening

“v) Our operating cash flow generation as a percentage of profit after taxes is 100%+ in FY21 and FY22 Three, investing for growth by using operating leverage and steady target operating margin band, we believe that our margin stance ensures stability while managing for key workforce retention strategies in a tough supply environment.”

Nitin Rakesh

opening

“We expect growth to accelerate through the remainder of FY23 especially with the green shoots from the supply side, with constraints having peaked in the recent quarter.”

Nitin Rakesh

“But I think that’s more an aberration, broadly, not really seeing any major short-term to medium-term impact.”

Kumar Rakesh

“My second question was around the comment, which you made that we expect growth to accelerate in the coming quarters.”

Nitin Rakesh

“But obviously, that is still playing through the run rate and that's the reason we said as we go through the next quarter or two, we will accelerate the growth as we get through the ramp-down effect of some of these businesses in the revenue run rate.”

Sulabh Govila

“And then with respect to fresher billability, by when do you think we should expect the utilization rate move up over the course of next few quarters and drive the growth from our fresher billability perspective?”

Nitin Rakesh

“So, I think there is an upward trend to utilization, we do expect it to move up.”

Manish Dugar

“But there certainly will be an northward bias to the margin, as we had said last time when we said the lower end at higher than the previous quarters.”

Risks & concerns — 15 flagged

A combination of macro trends and drastic reduction in the cost of computing, AI tools being widely available through Cloud platforms and open-source software, more and more clients appreciate the extraordinary impact of Cloud-based computing, hyper-personalized customer experiences, and heightened cyber and security mitigation models on their businesses.

— Nitin Rakesh

While there is talk of relentless privatization and pressure to reduce run spend, this creates opportunities to explore proactive cost value propositions like zero cost transformation and higher outsourcing to offshore or DocuSign Envelope ID: 02F2152E-AAF6-4B0D-9742-C6FF9007C3D8 nearshore driven by cost advantage, the need for faster time to market and globalization of talent models.

— Nitin Rakesh

While on a YoY basis we are still seeing good growth in Europe, there is higher impact of the current environment in that region, especially in conversion for TCV to revenue timelines getting stretched.

— Nitin Rakesh

The second question was around the Digital Risk business, I think it's fair to assume that we have obviously seen softening of especially the origination and the refinance business, but we did add new lines such as home equity loans, that has blunted the impact.

— Nitin Rakesh

DocuSign Envelope ID: 02F2152E-AAF6-4B0D-9742-C6FF9007C3D8 I think there was a comment made by one of the analysts around our balance sheet regarding the impact of Digital Risk on the profitability and I will ask Manish to clarify and explain that with some numbers.

— Nitin Rakesh

If you were to look at the reported numbers, by legal entity, the previous two years, the profit from Digital Risk business was 2.6% and 8.3% while this year, it looks like 33.5%.

— Manish Dugar

And since we stopped reporting Digital Risk as a separate line item, Digital Risk as a percentage of overall business has come down and its profitability has come down as well.

— Manish Dugar

And we should not draw any conclusions that Digital Risk impact will translate to that kind of profit impact on the company.

— Manish Dugar

— Sulabh Govila

On the Insurance question, Dipesh, you see despite the 3% decline quarter-on-quarter, we delivered a 22.8% growth on YoY basis which basically means that last quarter, we had some significant upside as you know some of the milestones got achieved.

— Manish Dugar

Dipesh that is very hard to forecast, because the environment is fairly fluid on that front, the rates are very volatile, you can look at the 10-year treasury of U.S.

— Nitin Rakesh

And we have also added some new service lines, especially around Risk, Compliance as well as servicing.

— Nitin Rakesh

It’s a fairly unique time and a fairly different environment, even if we head into a slowdown or a recession, the playbook of 2008-09 or 2000-01 not going to stand up because what used to be stable and staple in those time periods, is the most at risk in this environment, because the biggest leverage, all of our enterprise clients today has today is to accelerate the exit from legacy, and free up those sunk costs and CAPEX investments.

— Nitin Rakesh

So, I think this is a macro headwind blip in an early stage of a very large pivot.

— Nitin Rakesh

As we have mentioned earlier, it is extremely hard for us to call out a Digital Risk as a separate source of revenue, because it is very much an integrated offering.

— Manish Dugar

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Q&A — 14 exchanges

My first question was around the deal win side. So, first quarter for us typically is a seasonally strong quarter for booking deal wins, but this particular quarter, we have seen a moderation in deals in that context. Even if we take one $60 million plus deal in which you won in this month. And despite that, it looks like some moderation which we have seen on the deal win side. So, can you Nitin, give some color on what we have seeing on the deal win side, is the momentum slowing down in continuation to what you said that the TCV to revenue conversion has slowed in Europe?

Nitin Rakesh

There is a certain nuance that I want to just point out, there is a base effect at play, we announced the large $250 million 10-year deal in the same quarter last year. So, I think if you compare it on a YoY, Q1 to Q1, you will see a little bit of that aberration. $250 Mn, 10 years, not a regular, lumpy, you know, large deals as by definition lumpy. If I look at the $365 million, number for Q1, of course the deal kind of slipped into Q2, the $60 million deal, but I think it's a fairly robust flow. We are showing you the pipeline, which is a lead indicator. The Europe comment was, I think, spec

So, I have two questions, if you could provide any qualitative commentary on how the attrition is panning out. And in terms of what kind of a trend we are seeing within the company. And the other question is related to the Blink acquisition. So, have we been able to leverage the Blink clientele to win the kind of deal wins you were estimating at the time of acquisition? Thank you.

Nitin Rakesh

The first one, I think I called out for it, we are seeing green shoots, still too early to call. But attrition while still elevated, seems like it's stabilized, potentially, in some pockets, even softened, in terms of the trends. I think that will only continue to improve is the hypothesis we are playing with, given what is going on in the tech sector in the U.S., the startup community, the crypto sector. So, I think there's a lot of a lot of things that have happened in the last three months that are starting to play into the supply tightness that was going on especially onshore. Second, I th

So, I think we wouldn't really want to break out the exposure to capital markets. But I can tell you that if I stack rank the sub-verticals within Banking and Financial Services, capital markets will not be in the Top 5, pure capital markets. We are much more focused on consumer banks, payments, financial services in asset and wealth compared to pure investment banking, capital markets and trading. So, I think from that perspective, the reason why we are still seeing very strong growth in Top 10 customers or Top 5 customers, is again, a clear indication of the fact that so far, we have not see

Manish Dugar

Yes, actually, the comment was in relation to what we reported in the Annual Report. Annual Report basically takes the legal entity-wise reporting, and which also includes intercompany dividends. If you were to look at the reported numbers, by legal entity, the previous two years, the profit from Digital Risk business was 2.6% and 8.3% while this year, it looks like 33.5%. Majority of that 33.5% is actually because of dividend. And since we stopped reporting Digital Risk as a separate line item, Digital Risk as a percentage of overall business has come down and its profitability has come down

So, Nitin, within the Top 10 accounts, we have done quite well by continuing to gain market share over the past several quarters, but the flip side of that is the concentration risk that we see in our current environment, especially. So, how should we think about that, if the macro were to remain challenging over the next few quarters? How are you thinking about that internally?

Nitin Rakesh

Sulabh, there are two sides of the same argument, I would rather have deep strategic relationships where we are engaged in some heavy lifting for large programs that are less susceptible to ramp downs than having a long list of clients that are $5, $7, $10 million to us, because we will get consolidated up pretty quick. So, I think, to me, I would rather be in the first bucket than in the second bucket. And given that we are not talking about one client being 25% to 30% of revenue, we are actually talking about three clients who are in $150 million and Top 5 average around $150 million, I thin

Couple of questions, starting with the utilization, Nitin, just want to understand why can’t we sustain utilization at 78% to 80% or maybe upwards of 80% with growth? If ex-trainee, what constraint, whether a skill mismatch or if you can provide some sense, why we are not able to sustain because some of your peers can sustain utilization with sustainable growth trajectory, so that is question one. Second question is about Insurance business, it is showing weakness even if I look now segment profit, it is 500 bps lower than even pre-COVID era. So, if you can provide some sense about Insurance o

Nitin Rakesh

I think on the utilization front Dipesh, you have to realize that until last year, I think the question you used to ask us is why you don't hire trainees and your peers are hiring trainees. I think the answer is very simple. We started a Supply Chain Transformation Program this time last year. I have talked about the fact that we have onboarded 5,500 freshers for the first time in that larger DocuSign Envelope ID: 02F2152E-AAF6-4B0D-9742-C6FF9007C3D8 proportion of our overall workforce, in the last two quarters of FY22 and that's the Change Management Program that we are running internally. We

So, in the prepaid remarks, you made a comment about increased focus on RTB spend. So, does this create headwinds for volume growth, given automation focus in the RTB spends pipelines, any color would be helpful?

Nitin Rakesh

Abhishek, as I mentioned, right, it is not just important to look at demand overall, it is important to look at demand in context to the service lines on the value chain, that our company is operating in. It’s a fairly unique time and a fairly different environment, even if we head into a slowdown or a recession, the playbook of 2008-09 or 2000-01 not going to stand up because what used to be stable and staple in those time periods, is the most at risk in this environment, because the biggest leverage, all of our enterprise clients today has today is to accelerate the exit from legacy, and fre

Most of my questions have been answered, I have one query. And so if we see that transaction- based line item that we have, which is around 15% to 16% of our business, just wanted to get some sense how much of this business is coming from mortgage-related activity and how much is related to others.

Manish Dugar

Transaction based business is a combination of what we do in mortgage and a lot more than that. Including in the application side of things, there are contracts where we actually commit to delivering specific transactions as an outcome. As we have mentioned earlier, it is extremely hard for us to call out a Digital Risk as a separate source of revenue, because it is very much an integrated offering. So, I won't be able to give you a number in that Digital Risk, but it is a subset of that number. So, you should get a sense of how much the digital risk business at max could be. So, for our model

Nitin, sorry to harp again on the DR mortgage business but if you look at, as you very rightly said the environment remains very fluid. And if you look at your Direct business, after many quarters of very strong growth, this quarter was a little bit relatively weaker in terms of the performance if you look both on QoQ and YoY basis. You know was a majority of the relative weakness this quarter in Direct was on account of DR or were there other factors which are also contributing? And also within DR you have been talking about operations and compliance as potential opportunities. What portion o

Nitin Rakesh

Mukul, firstly, just to correct data points on a YoY basis we grew 28.3%. And I think the number is fairly top of the chart in terms of performance compared to the industry. On actual basis, I think, the run rate impact of the mortgage, I will call it the mortgage LOB although you call it DR, because we don't really have that nomenclature internally anymore. The mortgage LOB was one of the reasons why we called for the Q1 number to be in the range that it ended up being because we did call for short term weakness, and I think there is still some more run rate impact that is going to wash throu

As I mentioned earlier, we don't give the Digital Risk business numbers separately. So, we would hence not also be able to give what was the movement in Digital Risk on a quarter-on-quarter basis. From a margin perspective, if you look at quarter-on-quarter movement, actually there is an improvement in utilization both offshore and onsite, it’s not that the onsite utilization improvement was kind of helping manage the offshore utilization, offshore utilization improved 2% and onsite improved by 1% points. There are puts and takes on margins to your other question. Price increase is one tailwin

Management

So, the answers remain same, we don't have that number called out separately. On the overall revenue growth for the year, Nitin mentioned in his opening remarks, our momentum continues, philosophy for investing in growth while maintaining profitability, continues to be there. We don't call out any numbers or any specific Dollar value for the revenue for the year. You know, otherwise, we continue to believe that we will form the pipeline, TCV wins that we have had including the $302 million in Q1 plus the $60 million plus deal that we signed in July.

Management

Like I mentioned earlier, we don't call out the numbers, specifically. Last quarter, we talked about the fact that we are seeing headwinds in this business. Some of it had already impacted Q3 number, some of it impacted Q4. And it certainly had impacted Q1 numbers as well. The complementary services that we have built and Nitin’s comment around our ability to now take volumes in HELOC, we don't expect it to have any material impact on the numbers, as we go forward.

Nitin Rakesh

I think, I just want to make a comment that, almost everybody wants to know a number or a percentage of revenue. I think it's extremely hard because a lot of these lines are integrated into everything we do, putting out the platform to building the data, to doing the underwriting, bring regulatory compliance, it's very hard for us to continue to demarcate, service line contract-by- contract. So, it's not that we are not, we are trying to be elusive, it's just that it's hard to estimate because whichever we give it's actually going to be inaccurate given the way the business is integrated. I th

I had just one question, your onsite BPO headcount has declined on Q-on-Q basis, can you help me with that?

Nitin Rakesh

I think it's basically linked to the internal changing from the declines mostly came from the mortgage business that obviously we talked about quite extensively in the last 60 minutes. And there is a basically a correlation between what you're seeing in the in the BPO onshore numbers, and overall company growth mix.

I think somewhere you commented about the tailwind on the margin, which you may have. So, any bit of color in terms of what all could be those factors, one of course is currency and I mean the remuneration last year was also high relatively. So, is that what is an incremental thing with softening, relatively softening of the supply side problem and remuneration already been high for us on the portfolio basis. Those are things other than currency that you have.

Manish Dugar

The primary ones that we talked about is the tailwind of price increase, the tailwind of the potential opportunity to expand utilization, the growth coming from onsite and offshore centric revenue, which both basically come with higher margins, and the stock compensation and M&A charges that has been given, continuing to decline in absolute terms, actually decline even faster on the percentage terms. And beyond this, there are other initiatives being taken including starting to invest in building the fresher muscle, which was kind of put to rest for some time given we were trying to redeploy e

I just want to thank you all for continued interest in Mphasis and your sustained investment in time and effort. I think we are very focused driving our clients towards the future that they are all building towards. And we believe as I mentioned that we meet opportunities in the near to medium terms to further consolidate our position with many of our clients and we stay focused in executing to that vision. So, thank you again, and we look forward to talking to you next quarter.

Management

Speaking time

Nitin Rakesh

Moderator

Manish Dugar

Sulabh Govila

Mukul Garg

Rahul Jain

Kumar Rakesh

Nitin Jain

Dipesh Mehta

Abhishek Shindadkar

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Opening remarks

Nitin Rakesh

Thank you, Steven. Good morning, everyone. Thank you for joining our earnings call early this morning. While all of us are concerned about the post pandemic impact, geopolitical tension, high inflation and interest rates, supply chain disruptions, and its effect on global energy and food prices, we are still in a period of growth shaped by technology, and in fact, technology is being seen as the biggest counter inflationary tool and is reshaping the economic growth. As enterprises are trying to make their supply chains more resilient and future proof their businesses, they will require a more holistic and proactive tech strategy. A combination of macro trends and drastic reduction in the cost of computing, AI tools being widely available through Cloud platforms and open-source software, more and more clients appreciate the extraordinary impact of Cloud-based computing, hyper-personalized customer experiences, and heightened cyber and security mitigation models on their businesses. This

Our confidence stem from the following

(a) Continuing market-share gains with clients across tiers and verticals. (b) Ongoing robust spending plans of our high-quality client base. (c) Ongoing addressable market expansion as we extend and deepen our competencies, including through M&A and market presence. (d) And strength of our pipeline and track-record of converting pipeline to TCV and TCV into revenue. DocuSign Envelope ID: 02F2152E-AAF6-4B0D-9742-C6FF9007C3D8 Pricing, growth leverage and pyramid support our FY23 margin outlook after providing for rising supply side costs. With that, I am going to open it up for questions and answers. Back to you operator.

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