MPHASISNSEFull Year FY 2023April 28, 2023

MphasiS Limited

9,507words
79turns
14analyst exchanges
2executives
Management on call
Nitin Rakesh
CHIEF EXECUTIVE OFFICER – MPHASIS LIMITED
Manish Dugar
CHIEF FINANCIAL OFFICER – MPHASIS LIMITED
Key numbers — 40 extracted
75%
n and other software-driven transformation initiatives. In a recent survey conducted by McKinsey, 75% of the CIOs said that they intend to increase their organization’s spends in cloud, data and digi
4.5%
ercentage has DocuSign Envelope ID: 0E65416E-7FB3-4875-94B5-777B1C259814 declined to 4.5% in FY '23. Despite the decline, we sustained double digit revenue CAGR trajectory over this perio
15.6%
e digit revenue CAGR trajectory over this period. Our revenue CAGR for Direct over this period is 15.6% in constant currency terms. The quality of revenue is improving as it moves towards Direct busine
10 million
will detail that further in our subsequent sections. We've also more than doubled the number of $10 million and $20 million customers in the same period. Our quarterly average net new deal signings have mo
20 million
t further in our subsequent sections. We've also more than doubled the number of $10 million and $20 million customers in the same period. Our quarterly average net new deal signings have moved up 3 to 4 ti
412 million
7. Our FY '23 EBIT is nearly 2.5 times what it was in FY '17 as well. Our Q4 FY '23 revenue of $412 million represents a decline of 3.1% year-over-year in constant currency impacted by DXC and the mortgage
3.1%
imes what it was in FY '17 as well. Our Q4 FY '23 revenue of $412 million represents a decline of 3.1% year-over-year in constant currency impacted by DXC and the mortgage business. Direct revenue at
390 million
year-over-year in constant currency impacted by DXC and the mortgage business. Direct revenue at $390 million declined 3.4% sequentially and 1.8% in constant currency terms Y-o-Y in Q4. Direct ex DR declined
3.4%
ant currency impacted by DXC and the mortgage business. Direct revenue at $390 million declined 3.4% sequentially and 1.8% in constant currency terms Y-o-Y in Q4. Direct ex DR declined 1% Q-o-Q and
1.8%
d by DXC and the mortgage business. Direct revenue at $390 million declined 3.4% sequentially and 1.8% in constant currency terms Y-o-Y in Q4. Direct ex DR declined 1% Q-o-Q and grew 7% Y-o-Y reflecti
1%
declined 3.4% sequentially and 1.8% in constant currency terms Y-o-Y in Q4. Direct ex DR declined 1% Q-o-Q and grew 7% Y-o-Y reflecting the head-winded environment related to historically elevated
7%
entially and 1.8% in constant currency terms Y-o-Y in Q4. Direct ex DR declined 1% Q-o-Q and grew 7% Y-o-Y reflecting the head-winded environment related to historically elevated inflation and inter
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Guidance — 20 items
Nitin Rakesh
opening
“In a recent survey conducted by McKinsey, 75% of the CIOs said that they intend to increase their organization’s spends in cloud, data and digital.”
Nitin Rakesh
opening
“Despite the decline, we sustained double digit revenue CAGR trajectory over this period.”
Nitin Rakesh
opening
“Our revenue CAGR for Direct over this period is 15.6% in constant currency terms.”
Nitin Rakesh
opening
“On a consistent basis over the past three years, top clients have grown well with a 20% plus three-year revenue CAGR.”
Nitin Rakesh
opening
“While we expect to have a soft start to FY '24 as we deal with some slowdown in BFS, including a client-specific issue, and delayed contract conversions in this environment, we expect Q1 to be characterized by stability across segments with strong sequential growth starting second quarter onwards, which will result in a rising Y-o-Y growth through FY '24.”
Nitin Rakesh
opening
“For the full year, we expect to register at least industry average growth in Direct ex mortgage.”
Nitin Rakesh
opening
“As this plays out through FY '24, the mortgage segment, we believe, is close to bottoming out and we expect this segment to be incrementally stable through much of FY '24.”
Nitin Rakesh
qa
“Of course on the regional banks where there are impacts, we've definitely seen significant issues crop-up and ramp downs that obviously are baked into some of the numbers you see and some of the guidance you see.”
Nitin Rakesh
qa
“In Direct ex mortgage, we definitely expect certain uptick in Q1, but again, I think the environment is a little bit hazy, so we are expecting at least from Q2 onwards, the strong sequential growth in Direct ex mortgages.”
Nitin Rakesh
qa
“I think the quantum of decline will definitely, even if there is a decline in Q1 in the mortgage business, will be a fraction of what it was in Q3 and in Q4 in absolute terms.”
Risks & concerns — 15 flagged
As the global economic climate continues to remain uncertain, volatility and business resilience will coexist.
— Nitin Rakesh
Despite the decline, we sustained double digit revenue CAGR trajectory over this period.
— Nitin Rakesh
Our Q4 FY '23 revenue of $412 million represents a decline of 3.1% year-over-year in constant currency impacted by DXC and the mortgage business.
— Nitin Rakesh
While mortgage rates have started to decline, the market remains hyper-sensitive to interest rate movements with purchase demand experiencing large swings relative to minor changes in rates, leading to a freeze-up in activity in residential real estate markets.
— Nitin Rakesh
Contribution of Digital Risk, our mortgage BPS subsidiary, now stands at 6.8% of Q4 FY '23 revenue, down from 8.8% in Q3 FY '23 in reported INR terms.
— Nitin Rakesh
The BPS segment which suffered from a downturn in the mortgage segment declined 16% with the Y-o-Y decline in this segment increasing through FY '23 as we felt the brunt of the mortgage decline in the last two quarters of the financial year.
— Nitin Rakesh
Rest of the world grew 18% year-over-year in this quarter in Direct while the Y-o-Y decline in BPO widened to 32% due to mortgages.
— Nitin Rakesh
The TMT vertical also grew strong double digit in FY '23 at 17.4% with sequential impact primarily from the DXC revenue decline in Q4 over Q3.
— Nitin Rakesh
Despite the accelerated decline in the mortgage business, our EBIT margins at 15.3% stood steady through the year and within the stated band, resulting in EBIT growing at 15.4% in INR terms in line with revenue growth.
— Nitin Rakesh
While we expect to have a soft start to FY '24 as we deal with some slowdown in BFS, including a client-specific issue, and delayed contract conversions in this environment, we expect Q1 to be characterized by stability across segments with strong sequential growth starting second quarter onwards, which will result in a rising Y-o-Y growth through FY '24.
— Nitin Rakesh
Nitin, I probably missed this but excluding DR, is it still a decline on a sequential basis.
— Nitin Padmanabhan
And finally from a Q1 perspective, do you think what you're seeing on a run rate basis, can Q1 also be a decline?
— Nitin Padmanabhan
And finally, if you could just based on your experience, I think if you compare with COVID and now, we have seen a much sharper sort of two quarters of decline versus COVID.
— Nitin Padmanabhan
So Nitin, in terms of Direct, was the question, Direct ex mortgage, is there a sequential decline, is that the question?
— Nitin Rakesh
There is approximately 1% sequential decline in Direct ex mortgage, predominantly driven by some of the issues that we saw crop-up in March and some ramp downs that led out of that issue.
— Nitin Rakesh
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Q&A — 14 exchanges
Q
Yes. Hi, good morning. Nitin, I probably missed this but excluding DR, is it still a decline on a sequential basis. And second thing is, I think one of the calls we had yesterday I think suggested a freeze on spending by a few customers and that could sort of come away from post the end of Q1. Are you seeing a similar trend? And finally from a Q1 perspective, do you think what you're seeing on a run rate basis, can Q1 also be a decline? And finally, if you could just based on your experience, I think if you compare with COVID and now, we have seen a much sharper sort of two quarters of decline
Nitin Rakesh
So Nitin, in terms of Direct, was the question, Direct ex mortgage, is there a sequential decline, is that the question? Correct. DocuSign Envelope ID: 0E65416E-7FB3-4875-94B5-777B1C259814 There is approximately 1% sequential decline in Direct ex mortgage, predominantly driven by some of the issues that we saw crop-up in March and some ramp downs that led out of that issue. Your second question around is there a spending freeze. I think it depends, the answer is more nuanced. If you look at banks that are more Wall Street oriented, there is definitely reprioritization of spends because the act
Q
Sir, two questions, both on revenues, mostly an extension of the previous one. So, in the fourth quarter as you spoke about slight decline. And now you're guiding for steep decline behind us in terms of mortgage business. So, first is, now on you expecting Q1, Q4 revenues to be flattish or should we assume a steep decline in Q1 as well before stabilization returns in Q2. That's only for mortgage business. And then on the Direct side, now there is some, what should I say, there is some commentary, commentaries are different across various companies. So, to that extent, what are we expecting fro
Nitin Rakesh
Sure. So I think the quantum of decline that we saw in Q3 and Q4 is definitely behind us. We are not expecting that quantum of decline in Q1. I think the question is are we at the bottom or are we near the bottom. I think the answer is, we are definitely near the bottom and we probably get a little better idea over the next few weeks on whether Q1 is the bottom or Q4 was the bottom. I think the quantum of decline will definitely, even if there is a decline in Q1 in the mortgage business, will be a fraction of what it was in Q3 and in Q4 in absolute terms. And the reason I'm not able to give yo
Q
It is clearly a tough quarter. I wanted to get a sense. Nitin, how the demand, billings and bookings evolved through the course of the quarter. Was it consistently bad from January and February or did you see this more later in the quarter in March, which is why you're pointing to the weakness in the first quarter. That's the first question. The second question is, you've highlighted, you've obviously seen continued and sustained signing success, very good signings momentum despite the revenue softness. Is there a certain level of signings that you need for Mphasis to stay at the same place on
Nitin Rakesh
So Ankur the answer is two parts. Firstly, at least on the mortgage side, things definitely got tougher through the quarter, because as I mentioned, January was a bump in volumes given the new mortgage rates were at or below 6% and home equity line was actually quite robust, but both of those, kind of, had a ramp down through the quarter. On the TCV side and on the Direct side. I don't think there was any perceptible deterioration barring obviously the two weeks in March where there was significant re-prioritization of just executive bandwidth in dealing with some of the issues. Some clients w
Q
Well, part of my questions already been answered in response to Ankur's question. I just wanted to get a sense on what are you seeing with one of your large customers on the logistics side which has decided to target significant cost savings as well as in-house more work or ship more work in-house with the setting up of the new captive in Hyderabad.
Nitin Rakesh
I think again not to go into specific client items but the two themes that continue to resonate including with the customer that you are referring to without naming. Firstly, we are actually very, very strongly positioned when it comes to being the transformation partners. You also noticed there is not just a cost and a captive conversation, there is also a significant reorg of the whole tech and infrastructure estate that they run across the org. And I think we are the chosen partner for that and have been for a period of time. In short, the wallet share gains there have DocuSign Envelope ID:
Q
In initial remark, you highlighted that your non-BFSI deal pipeline growth is 55%. So within that, can you highlight which verticals to which segments will be much more growth and sharper or faster recovery. And second question, if you can give some more light in terms of geography- wise outlook. These are two of my questions.
Nitin Rakesh
I think outside of BFSI, just by sheer size of the vertical, Hi-Tech/TMT has the biggest pipeline. We have also seen green shoots of recovery in the current calendar year in that business. Last DocuSign Envelope ID: 0E65416E-7FB3-4875-94B5-777B1C259814 year was a tough year. While the Q4 headline number shows a decline sequentially, in Hi-Tech that's largely driven by DXC as I said in my comments. So I think if I look at just sheer size of large deals, Hi-Tech is probably the one that definitely is leading the charge but there are also interesting deals in travel and logistics. We just talked
Q
Couple of questions. First about just some comment about the vertical growth trajectory. If I look at insurance, insurance remained weak for some time for us. If you can provide some sense what is currently going on in insurance because we had hoped for growth, but it has so far not played out in terms of recovery in that vertical. Second thing is logistics. Even though Y-o-Y growth is good, but for last four, five quarters, you can look at, it is very flattish kind of performance. So after a good run, when we used to club it into emerging separate it out significant growth trajectory, now it
Nitin Rakesh
Dipesh, let me take those three in the order that you asked that question, I think you’re right, insurance has underwhelmed us as well, specific to a large client issues that has gone through some significant corporate restructuring activity, but we won two large deals in insurance in the last two quarters and as they start to ramp up starting late Q4, early Q1, we’ll definitely see sequential growth popping-up in insurance in Q1. With this vertical realignment, that’s one of the byproducts of that will be hyper growth laser focus on each of these segments which is the DocuSign Envelope ID: 0E
Q
So Nitin, consolidation and taking wallet share through zero-cost transformation in large accounts is one of the key drivers of our growth. So what are the trends there across verticals and is there a decision making slow-down there as well. And secondly, we have a significant exposure to our top 10 clients. Any client-specific issues to call-out and how material are these from an exposure perspective. And then I have a follow-up.
Nitin Rakesh
Sure, Ashwin. I think, as I explained, deal making is happening. Deal origination is actually happening much more at a robust pace because there is extreme amount of openness and willingness from a client to hear a story how on we can construct a transformation thesis without actually asking for fresh funding. And I think that has definitely opened-up a whole series of opportunities. It's not that we were not taking this solution to market in FY '21 or FY’22, it's just that the enterprise segment was so flush with spend money at that point that they were more focused on spending than saving. A
Q
Three questions if I may. The first is on the top customer. In the growth, can you just give us some color, was there any specific ramp up of project, what drove that. The second is, I wanted to get a sense on the portfolio of Blink UX, we had a great capability, but exposure to BFSI and Hi-Tech. So what you're seeing in that market from a demand standpoint would be helpful. And the third question is on the employee number. The deduction that you seen, is it largely voluntary or is there involuntary component in that as well.
Nitin Rakesh
Sure. So I think on the large customer, I mean, again, not to get into specific client commentary, I think there again is a wallet share gain play that we've talked about over the last 12 months. You can expect that from a wallet share perspective, we will continue to have very strong position there. Whether that spend continues to hold-up, if there is any fluctuation, we'll probably find out over the course of next quarter or two, but from a positioning standpoint, from a spend standpoint, we feel fairly confident that our position remains strong there. Secondly, on Blink, I think bulk of tha
Q
Thanks for the opportunity. So first question, can you give some color in terms of our exposure to regional US banks that may lead to any new client-specific issues and that is the reason we are calling out the first quarter BFS being soft and if yes, will it bottom out in the Q1 or that softness will continue beyond Q1 as well.
Nitin Rakesh
I think as it stands today, we already saw some hit on that in March. And on a run rate basis, that will definitely show up in Q1. Again things might change because that's a very fluid position, but we already gave out the fact that our total exposure is low single digits. So that should give you some sense on what the impact can be. Obviously, we're not expecting it to fall off to zero either. So definitely, we think that Q1 is probably the biggest hit there. And after that we should definitely see stabilization on a sequential basis. Okay, thanks and all the best.
Q
Hi sir, what is the percentage contribution of mortgage business in the current quarter, which was 8% last quarter.
Nitin Rakesh
I think I mentioned that in my remarks. It is 6% change. 6.8%.
Q
Hi, just one question on the mortgage business. So what is the mix of origination and home equity in mortgage for us. I think last quarter we had called out home equity portion might still be vulnerable even though there might be some stability in the home division part of mortgage. So what is our view on the business segment within mortgage now.
Nitin Rakesh
Shradha, you are very difficult to hear because I think there is some disturbance on your cell phone. Is the question, what is the current mix of home equity versus the rest or is the question? Yes. Home equity versus origination in mortgage and what is the view on the home equity portion? DocuSign Envelope ID: 0E65416E-7FB3-4875-94B5-777B1C259814 So I think about a third of the business continues to be non-origination, non-diligence based, so that's kind of where we are at the end of Q4. That, obviously, mix was very different two years ago where home equity was almost non-existent for us. Do
Q
I think I've already answered a lot of the growth-oriented questions around outlook for the year even at the segment level. So I won't repeat that answer. I think the question on our new technology is probably in relation to all the buzz in the market around ChatGPT and AI. Mphasis has actually been one of the leaders in this space for the last few years. As early as FY '19, we've actually had our own machine learning platform and we've also incorporated earlier versions of GPT as well as GPT4 into those algorithms. These algorithms are available for consumption on the AWS marketplace for the
Management
Q
I think difficult to answer the timeline, but I will take that question as I can answer it which is, M&A is very much on our execution path. We've constantly looked at deals, especially in the recent quarters. We have deals under consideration, we have deals under diligence and potentially as we expand our outlook given the current environment, we will also get a lot more strategic in looking at using M&A as a tool to expand our growth and diversify into new verticals and new geographies as well. So all of that is in our consideration set for FY '24 and again, hard to confirm when a deal will
Management
Q
Thank you all for your time and your interest. We look forward to talking to you next quarter and we will continue to drive responsible growth. And I believe it's a long weekend, so take care and enjoy the long weekend.
Management
Speaking time
Nitin Rakesh
29
Moderator
16
Nitin Padmanabhan
5
Mohit Jain
5
Manish Dugar
5
Ashwin Mehta
4
Shradha
3
Ankur Rudra
2
Manik Taneja
2
Mitul Shah
2
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Opening remarks
Nitin Rakesh
Thank you Aman, and thanks everyone for joining us today. I know it's a busy day with multiple earnings calls and we appreciate your interest in Mphasis. I trust everybody has had a chance to review our earnings release documents. As the global economic climate continues to remain uncertain, volatility and business resilience will coexist. While enterprise digital transformation remains a core strategic priority for 2023, cost takeout and optimization requirements are also in great demand, given the macro environment. Strategic tech spends have slowed down, however, haven't been paused. There is sustained investment in cloud and digital transformation. Cost transformation projects that will free up working capital for cloud, digital and consolidation are a priority as clients optimize through increased productivity, automation and other software-driven transformation initiatives. In a recent survey conducted by McKinsey, 75% of the CIOs said that they intend to increase their organizat
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