MPHASISNSEQ2 FY23October 21, 2022

MphasiS Limited

9,421words
70turns
12analyst exchanges
3executives
Management on call
Nitin Rakesh
CEO
Manish Dugar
CFO
Nitin Rakesh
CEO of Mphasis and Mr. Manish Dugar – CFO.
Key numbers — 40 extracted
16.8%
n 2023 as enterprises contend with difficult macro conditions. Our Q2 FY23 revenue represents a 16.8% YoY growth in constant currency terms. Direct revenue grew 2% quarter over quarter and 19.2% year
2%
Our Q2 FY23 revenue represents a 16.8% YoY growth in constant currency terms. Direct revenue grew 2% quarter over quarter and 19.2% year over year in constant currency. In the second quarter FY23, w
19.2%
ts a 16.8% YoY growth in constant currency terms. Direct revenue grew 2% quarter over quarter and 19.2% year over year in constant currency. In the second quarter FY23, we experienced a furlough impact
94%
-4EA8B172B43E sequential growth in the second quarter FY23. Our Direct business accounted for 94% of revenue in this quarter. DXC's contribution to our revenue is 4.6%. Given the low and declinin
4.6%
irect business accounted for 94% of revenue in this quarter. DXC's contribution to our revenue is 4.6%. Given the low and declining contribution of DXC to our overall revenue, Direct business strong g
20.4%
rding geographic growth, our anchor geography Americas has fared better with an overall growth of 20.4% in constant currency terms. Excluding DXC, the US growth is marginally higher at 21.4% in constan
21.4%
growth of 20.4% in constant currency terms. Excluding DXC, the US growth is marginally higher at 21.4% in constant currency terms. From a services perspective, our Application service line has been a
34%
From a services perspective, our Application service line has been a driver of our growth with 34% growth in Direct Apps this quarter, thanks to the secular themes of digitization and transformati
15.3%
and Financial Services, which saw an impact from a decline in the mortgage LOB, nonetheless grew 15.3% in constant currency terms. Direct BFS grew 15.7% in constant currency terms on a YoY basis. We c
15.7%
a decline in the mortgage LOB, nonetheless grew 15.3% in constant currency terms. Direct BFS grew 15.7% in constant currency terms on a YoY basis. We continue to enjoy market share gains with our key
33%
YoY basis. We continue to enjoy market share gains with our key BFS customers. Direct TMT grew 33% year over year in constant currency terms. This is a focus vertical for us. Direct Logistics and
16.5%
urrency terms. This is a focus vertical for us. Direct Logistics and Transportation business grew 16.5% in constant currency terms. Our smaller verticals such as Healthcare clubbed in the Others segmen
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Guidance — 20 items
Nitin Rakesh
opening
“As per a recent tech spending survey by Bain, two-third of surveyed enterprises expect to increase IT spends in 2023.”
Nitin Rakesh
opening
“Nearly two-third of the surveyed enterprises expect vendor consolidation to be a priority area, which we believe this is likely to play out with greater vigor in 2023 as enterprises contend with difficult macro conditions.”
Nitin Rakesh
opening
“We are confident that we will be strong net grainers in such scenarios based on our positioning and track record with them and prior outcomes in such scenarios in the past.”
Nitin Rakesh
opening
“(3) Investing for growth by using operating leverage and operating in a stated target operating margin band.”
Nitin Rakesh
opening
“We are seeing some seasonal weakness in select clients but a strong order book in the quarter and 18% increase in the pipeline would help us navigate this going forward.”
Nitin Rakesh
opening
“Given our actions on operation efficiency, we also intend to continue to invest in growth accounts to consolidate our position with the key customers, and a stable margin outlook gives us that flexibility.”
Nitin Padmanabhan
qa
“Incrementally, are you seeing any slowness in decision making that worries you in terms of closures that could impact next year in some form?”
Nitin Padmanabhan
qa
“The second is, considering the furloughs DocuSign Envelope ID: 0019CE48-85A0-4F19-BA1F-4EA8B172B43E that you have seen in this quarter, how do you see furloughs going forward in Q3?”
Nitin Padmanabhan
qa
“Do you expect it to be higher than the previous years?”
Nitin Rakesh
qa
“At this point, I think it is hard to say whether the impact will be higher or lower.”
Risks & concerns — 15 flagged
Tech spends appear to be more resilient relative to the volatile macro conditions compared to their behavior in the past.
— Nitin Rakesh
Nearly two-third of the surveyed enterprises expect vendor consolidation to be a priority area, which we believe this is likely to play out with greater vigor in 2023 as enterprises contend with difficult macro conditions.
— Nitin Rakesh
Our anchor vertical, Banking and Financial Services, which saw an impact from a decline in the mortgage LOB, nonetheless grew 15.3% in constant currency terms.
— Nitin Rakesh
Coming to our financial metrics, our margin philosophy affords us the flexibility to manage our profitability in a volatile environment.
— Nitin Rakesh
We believe that our margin stance ensures margin stability in a volatile environment.
— Nitin Rakesh
Coming to our FY23 outlook, we continue to maintain our growth focus even in the uncertain macro environment.
— Nitin Rakesh
This definitely is a seasonally weak quarter, not only because of the furlough issue but also because of the holiday season and the number of working days issue.
— Nitin Rakesh
But we have been continuously hearing from them about increasing concern from their business, literally almost every month.
— Mukul Garg
How do you see that, and is that something which can kind of act as a risk to our growth?
— Mukul Garg
By the way, that kind of growth is after the impact of mortgage as well.
— Nitin Rakesh
Second related is on TMT decline, like, what happened in that particular segment quarter-on-quarter, how is the deal flow, and what kind of outlook do we have there?
— Mohit Jain
Taking your first question, as Nitin was mentioning, there is an impact of furlough and there is an impact of mortgage business, which is contributing to TCV not translating into revenues as much as it should have.
— Manish Dugar
It is a specific impact in the quarter, and Q3 being a seasonally weak quarter anyways, I think probably we should be able to tide over that, as we get to Q4.
— Manish Dugar
Yes, again, I think there is a slightly mixed impact of furlough plus in-account actions, but at the same time, the deal wins that we talked about will actually start ramping up offshore as well.
— Nitin Rakesh
If we don't have a challenge in meeting our demand, we would not like to continue increasing that bench.
— Manish Dugar
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Q&A — 12 exchanges
Q
The first is, Nitin, how do you see the demand environment sort of evolving? I am sure the deals that you have closed this quarter would be the ones which you have been chasing for a while now. Incrementally, are you seeing any slowness in decision making that worries you in terms of closures that could impact next year in some form? The second is, considering the furloughs DocuSign Envelope ID: 0019CE48-85A0-4F19-BA1F-4EA8B172B43E that you have seen in this quarter, how do you see furloughs going forward in Q3? Do you expect it to be higher than the previous years? Finally, on the Logistics v
Nitin Rakesh
Let me take the first one which is the demand environment. I think uncertainty is obviously not good because it creates all sorts of chaos when it comes to budgets and in-account actions and so on. I think despite that, 300 million plus TCV in quarter is actually a fairly satisfying number. We are very happy with the fact that we were able to close 2 large deals both meaningful. And I think there is definitely additional opportunity that is being thrown up as well through the environment. That's the reason pipeline has actually gone up and all the actions that we talked about from a playbook p
Q
Nitin, basically given the diminishing contribution of mortgage business to your overall revenues, it would be helpful if you can just give us some sense of how the ex-mortgage core business grew during this quarter. Even qualitatively that would at least give us some sense of how to look at the Direct business. And second, on your top client, the growth was quite good. But we have been continuously hearing from them about increasing concern from their business, literally almost every month. How do you see that, and is that something which can kind of act as a risk to our growth?
Nitin Rakesh
Mukul, I think for the first question, the answer is that in the core business, there are some data points in the print that you can see. The Americas Applications, both of those metrics are a good indicator of how the core business growth has been. I think 34% application YoY growth and applications are now the highest it has ever been at 67% to 68%. I think those are 2 metrics that will give you a sense that outside of the mortgage LOB, the business has actually been fairly robust, both in terms of other metrics that I point to is the Top 5 and Top 10. By the way, that kind of growth is afte
Q
Compared to the TCV wins that we had, the growth reported in the Direct business for the last 2 quarters is relatively slow. So, should we expect while numbers suggest, there should be a pickup in the next 2-3 quarters? And the correlation also reflects that. Is that a fair assumption or you think despite TCVs in the pocket, we may still see slower growth over the next 6 to 9 months? Second related is on TMT decline, like, what happened in that particular segment quarter-on-quarter, how is the deal flow, and what kind of outlook do we have there? And last one is related to utilization and marg
Manish Dugar
Taking your first question, as Nitin was mentioning, there is an impact of furlough and there is an impact of mortgage business, which is contributing to TCV not translating into revenues as much as it should have. Even though if you look at it, the correlation coefficient of TCV conversion to revenue has remained steady. From a going-forward basis, TCV and pipeline growth gives us confidence that our conversation with the customers and our ability to convert deals continues to be good including large deals, having won 2 large deals adding up to $110 million in the quarter. So far as TMT is co
Q
In terms of the client in which we witnessed the furlough in this quarter, that client back in terms of normal operations or there could be some further impact in this quarter as well?
Nitin Rakesh
As I mentioned, it is too early to talk about client-specific impacts in Q3, but again, keep in mind, this is a client that has a pattern of year-end closures and I think that impact might continue in this quarter as well, but we will obviously try to mitigate as much as we can in terms of what we think is doable. Nitin, can you throw some light in terms of how the mortgage business one should look like on a going-forward basis? Has it now bottomed out, or there could be further headwinds as a whole, entering into the second half? Unfortunately, I think it is very hard for me to give you a for
Q
A couple of questions. First, I just want to understand the correlation decline now from deal win to revenue conversion. Earlier correlation used to be 93% to 94%, now it came down to 85-odd DocuSign Envelope ID: 0019CE48-85A0-4F19-BA1F-4EA8B172B43E percentage when growth rate also moderates while deal intake remained more or less about $300 million. So, can you help us understand how it plays out? Second thing is about the deal pipeline QoQ growth. If I look for the last 2 quarters, growth remained healthy, but deal intake is not showing that kind of sustained trend. So, if you can provide so
Manish Dugar
Dipesh, I will take the first question and probably Nitin will take the subsequent one. While you are right that the correlation coefficient is looking like 0.9% going to 0.8%. The primary reason for that is the impact that we saw because of, on one side mortgage business slowing down, on the other hand furlough, both of which impact the run rate revenue which, as you know, are cyclical and hopefully will correct as the interest rate corrects. But for that, the correlation coefficient of TCV conversion to revenue continues to be in that 0.9% range. On the second point around deal cycles, I thi
Q
The utilization was probably at a level where there was an opportunity to improve. And as we had more people deployed to billable projects, we did not necessarily need to recruit people to fulfill that requirement. We could use the people who were in the bench to do the fulfillment, and that led to a reduction in non-billable people.
Nitin Rakesh
By design. Yes.
Q
One question, in terms of our on-site headcount seems to have gone up by almost 9% while on- site revenues are down. What explains that? Is it the transition for the new deals that you signed in? And has that had an impact in terms of your margins as well?
Manish Dugar
As you know, most of the mortgage revenues are on-site and a large part of the furlough impact was also on-site. So, you are right that while the headcount increase has happened on-site, it is not showing up in terms of revenues because of these 2 large primary factors. No Manish. I was talking about the tech services headcount. Tech services headcount is up 9% for you sequentially. The BPO headcount is actually down on-site. What explains the substantial increase in on-site headcount? Our utilization seems to have dropped on-site and our on-site revenues also seem to have dropped. The headcou
Q
A couple of questions from my side. I am sorry if I missed that. Somewhere in between, I got dropped off. Can you just provide us a broad range as to how much of percentage of our revenue today would be the mortgage centered business and how much of that would be interest rate sensitive? I know you mentioned it's hard to give an outlook, but as a percentage of our revenue, how big could it be?
Nitin Rakesh
We started clubbing it in the Direct business 2 years ago and I don't think we want to break it out separately at this point. All I will tell you is the interest rate-sensitive piece of the business is kind of low single-digit percentage of revenue, but that's kind of where we will stop with the disclosure. Also, Nitin, I just wanted to basically dig a little bit deeper into the margin trajectory. I think last year when the entire sector had tailwinds from lower travel cost and facility expenses and all, you had mentioned that we are utilizing that to reinvest into the business to secure growt
Q
Just to understand this headcount addition in on-site, is it fair to assume that the going forward onshore revenue would increase and that could have a margin impact? And also just to understand the new deals, when would be the ramp-up starting for the newer deals that you have won? because these are fairly large deals and will take time? And whether initial period would be on-site role because that would then again also have a bearing on the margins?
Manish Dugar
Sameer, first of all, the headcount addition on the IT and apps business happened towards the end of the quarter, which is why it did not reflect in revenue in the quarter. And like Nitin mentioned, it should come-in in the run rate revenue in quarter 3. From a profitability DocuSign Envelope ID: 0019CE48-85A0-4F19-BA1F-4EA8B172B43E perspective, as we had talked about in our previous calls, the margins are not measured based on offshore, on-site, etc. Typically, we try and make sure that the delivery assurance and the quality of delivery is primary and then we decide how much should be on-site
Q
If you could give some context on what's driven the drop in S&M expenses, and how we should think about that? And same thing on the gross profit line as well. If you could give some context on both, that would be helpful.
Manish Dugar
Furlough and the investments that we make in making sure that we are proactively working with the client for large proposals and consolidation initiatives, those are primarily gross margin and COGS-related costs and they impact the gross margin. From a gross margin to gross profit, I think that's primarily a numerator than a denominator change because of currency movement. And as you know, the currency moved significantly. While the gross margin moved by 1.7%, the gross profit moved by 3%, primarily because the translation led to a movement in the percentage higher than what the gross margin p
Q
I just had a couple of questions. First one is that, if you can just help me, how are we going to do things differently in Q3 and Q4 so that we can get a double-digit run rate of growth? And the second point is what would be a comfortable level of utilization that we are looking at going forward?
Nitin Rakesh
Abhinav, we are already at healthy double-digit levels of growth in the Direct business, it is close to 20% growth. Again, our business is fairly straightforward in terms of how we think about the health of the business and the future prospects. Lead indicator is pipeline, second indicator is TCV conversion and then everything follows from there. Pipeline to TCV, TCV to revenue, revenue to margin. Of course, there are lots of other moving parts in the process that we need to manage on a pretty dynamic basis. But that's really the way we think about the business. I think we have very transparen
Q
I think we are living through some interesting times. Overall, I am pleased with how we are navigating through this. We continue to focus intensely on executing our strategy, and while supporting our clients in this complex environment. We will continue to actively reinvest capital into our business to meet our customer needs and drive organic as well as inorganic growth. Thank you all for your continued interest in Mphasis and your sustained investment and time. Wish you all a very Happy Diwali.
Management
Speaking time
Nitin Rakesh
19
Manish Dugar
15
Moderator
14
Mohit Jain
4
Sandeep Shah
3
Ashwin Mehta
3
Vibhor Singhal
3
Sameer Dosani
3
Nitin Padmanabhan
2
Abhinav Ganeshan
2
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Opening remarks
Nitin Rakesh
Thanks everyone for joining us today. Apologies for a late start. We were waiting for confirmation on the upload of the deck to the exchanges. This is a unique and dynamic environment, represents both challenges and opportunities for all of us. Regardless of the circumstances, we continue to move forward from a position of strength. We have a foundation of strong industry solutions, marquee client base, and earnings and cash flow. All of this will help us continue to execute our growth strategy and insulate us from market challenges. Let me start by sharing some insights that we witnessed from our vantage point. As per a recent tech spending survey by Bain, two-third of surveyed enterprises expect to increase IT spends in 2023. Tech spends appear to be more resilient relative to the volatile macro conditions compared to their behavior in the past. Furthermore, changing deal constructs and managing flexibility in fixed costs favor tech spends. Top client priorities continue to be levera
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