MPHASISNSEQ1 FY 2024July 21, 2023

MphasiS Limited

9,704words
70turns
10analyst exchanges
2executives
Management on call
Nitin Rakesh
CHIEF EXECUTIVE OFFICER – MPHASIS LIMITED
Manish Dugar
CHIEF FINANCIAL OFFICER – MPHASIS LIMITED
Key numbers — 40 extracted
707 million
executing towards. One, we have set a strong pace of the deal closures with record TCV wins of USD707 million this quarter, providing a visibility of growth for future quarters. We would be double clicking o
100 million
wice our quarterly average on an LTM basis. Nearly 1/3rd of this is from AI deals, including a USD100 million+ deal. As you are aware, we launched Mphasis.ai, a first of its kind business unit that seamlessl
70%
ins in this quarter are from non-BFS segments as well as from beyond our Top 10 accounts and over 70% are in the application service line. Specifically, I would also like to cite our significantly
40 million
y, I would also like to cite our significantly increased traction in Canada, where we signed a USD40 million+ deal and several more are in the pipeline. Our pipeline in Canada has grown 500% year-over-year,
500%
gned a USD40 million+ deal and several more are in the pipeline. Our pipeline in Canada has grown 500% year-over-year, and revenue has doubled sequentially in this geography. Almost all our pipeline c
6%
in this geography. Almost all our pipeline continues to be Tribe-driven, archetype-led and is up 6% sequentially and 23% year-over-year despite record conversion from pipeline to new sold TCV in th
23%
Almost all our pipeline continues to be Tribe-driven, archetype-led and is up 6% sequentially and 23% year-over-year despite record conversion from pipeline to new sold TCV in the last 4 quarters. Ou
40%
buted across verticals. While BFS continues to generate the higher share of pipeline at just over 40% of the pipeline, other verticals have a disproportionate share of pipeline compared to their reve
63%
aller verticals such as healthcare has been particularly robust with pipeline in this vertical up 63% year-over-year. Our accelerated GTM motion in AI builds on the AI TCV in this quarter and helps b
rs. 2
builds on the AI TCV in this quarter and helps build a strong inflow deal engine for future quarters. 2/3rd of our pipeline is application-centric, further reflecting the strength of our Application Tr
398 million
hored in our strong client mining model and tech-led offerings. Our Q1 FY24 revenue came in at USD398 million, impacted primarily by softness in banking. On an LTM basis, we grew the Direct ex-DR business at
11.2%
impacted primarily by softness in banking. On an LTM basis, we grew the Direct ex-DR business at 11.2% in Q1 FY24.With growth becoming more diversified and uptick in mortgage volumes, we see stability
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Guidance — 20 items
Nitin Rakesh
opening
“We expect further improvement during the course of FY '24.”
Nitin Rakesh
opening
“We do expect additional deal archetypes to continue to get robust as we expand on these offerings.”
Nitin Rakesh
opening
“On an LTM basis, we grew the Direct ex-DR business at 11.2% in Q1 FY24.With growth becoming more diversified and uptick in mortgage volumes, we see stability in performance going forward.”
Nitin Rakesh
opening
“While growth rate in insurance has lagged, impacted by client specific issues, sequential growth, TCV wins and pipeline in this vertical look healthy, and we expect to continue to the trend on a sequential basis.”
Nitin Rakesh
opening
“We expect this to come back as mortgage spends resume their up cycles.”
Nitin Rakesh
opening
“In this quarter, our EBIT margin stood at 15.4%, DocuSign Envelope ID: BBBBE627-86C7-414C-B7AC-066AEAB08347 within the stated margin guidance band of 15.25% to 16.25%.”
Nitin Rakesh
opening
“And five, despite the challenging revenue situation of late, our EBIT margins of 15.4% stayed steady and in line with the stated target operating margin band.”
Nitin Rakesh
opening
“We expect strong sequential growth going forward with an expectation of acceleration through the remainder of the year.”
Nitin Rakesh
opening
“As this plays out for FY24, we believe the mortgage segment is likely bottoming out in Q1, and we expect this segment to be incrementally sequentially growth accretive through much of FY'24.”
Nitin Rakesh
opening
“As also noted on our previous call, we now have visibility to stability in the DXC segment and expect that headwind to abate on a sequential basis.”
Risks & concerns — 15 flagged
Which has suffered from the downturn in the mortgage segment over the last 4 quarters, declined 33% with Y-o-Y decline in this segment increasing for the past 3 quarters.
— Nitin Rakesh
The contribution of Digital Risk, our mortgage BPO subsidiary now stands at 6.3% of overall revenue in Q1 '24 versus 12.7% a year ago in Q1 '23.
— Nitin Rakesh
An operating profit decline of 4% Y-o-Y on a reported basis is due to revenue headwinds.
— Nitin Rakesh
Our EPS of Rs 21 for this quarter is a marginal decline of 2% sequentially.
— Nitin Rakesh
As noted on our last call, we expected to have a soft start to FY24 as we work to deal with some slowdown in BFS and delayed contract conversion in this segment.
— Nitin Rakesh
As also noted on our previous call, we now have visibility to stability in the DXC segment and expect that headwind to abate on a sequential basis.
— Nitin Rakesh
So I think there's a significant opportunity in the whole governance, risk, compliance and documentation phase.
— Nitin Rakesh
The fourth thing that I want you to think about is that in the current environment, not only are we seeing tightness in spend, but there was a pretty significant pressure any time you had a project closure or you delivered a program, it got harder and harder to find shorter-term organic growth programs to fill that bucket.
— Nitin Rakesh
While it's been a headwind for people who manage those infrastructure assets and data center services, it's been a huge tailwind for players like us who are always asset-light and focused more on the application as well as transformation side.
— Nitin Rakesh
So I think first is, on the Digital Risk side, you mentioned a request for increase in capacity.
— Nitin Padmanabhan
And second is related to the split of BFSI decline that we saw in 1Q.
— Mohit Jain
Of course, on a sequential basis, I think it (Direct BFS) had a decline, approximately 8%.
— Nitin Rakesh
If I focus on these 2 metrics, I don't see significant areas of concern that give us a pause saying, we need to double down or we are not really well-placed in any of our top accounts.
— Nitin Rakesh
But when you think about it, this came despite the sharp decline in revenue and the pressure we had continuing from the prior quarters on a variety of metrics.
— Manish Dugar
While the macro environment continues to remain uncertain, we are very pleased with the record breaking TCV as well as the large deal wins this quarter.
— Nitin Rakesh
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Q&A — 10 exchanges
Q
My first question was on how are you classifying the AI deals? You talked about 1/3rd of the TCV are in the AI deals. So suppose if we classify into 3 segments, preparatory work for building AI models or consulting and development of AI models or testing of those models. How would you be classifying your AI deals? And where are you seeing the most part of the demand coming from?
Nitin Rakesh
Kumar, I think there is more to AI than just GenAI. That's the first point. I think a lot of the deal making and the activity that we are undertaking right now is in essentially helping clients implement orchestration platforms and third-party products that actually enable them to roll out these models across the enterprise. Of course, they are going to continue to use the publicly available LLMs, open source LLMs. But at the same time, those LLMs need to be trained. They need to be configured. They need to be set up with the right security protocols, as well as integrated with their existing
Q
Just maybe to start with, Nitin, could you maybe elaborate on this TCV that you've been able to achieve this quarter. Clearly, it's been very healthy and very strong. From what I can see, the net TCV announced is more than the revenues in the last 12 months and of course, we've seen some challenges in terms of conversion there. So, could you maybe highlight if there's any change in your confidence of the conversion going forward, which is driving your confidence on growth returning? And if it's possible to sort of also break out the moving parts within DXC, DR and the rest as it translates to
Nitin Rakesh
So, Ankur, there are 2 things to think about. I think you mentioned that our TCV closure in the last 4 or 5 quarters has been almost one to one because it's Direct TCV. The way to think about it is while that has a definite impact in providing revenue visibility, the leakage of discretionary cuts, the leakage coming out of mortgage units as well as on a Y-o-Y basis, of course, we've declined the DXC business- all those three obviously have been headwinds to revenue on a run rate basis. The fourth thing that I want you to think about is that in the current environment, not only are we seeing ti
Q
So I had a couple of questions. So I think first is, on the Digital Risk side, you mentioned a request for increase in capacity. So I'm just surprised that it has happened so early because the rates still seem so high. So contextually what's really happening here that it's sort of picking up earlier than one would imagine? So I think that's the first question.
Nitin Rakesh
You have to think about not just the new originations. I think the rate-sensitive part of the business is first mortgage and refinance. There are four other lines of business that are not so rate sensitive. One is the whole home equity line of credit. We talked about that in the last 12 months. There, given that housing prices have remained fairly stable, there is an opportunity that consumers are tapping into to take out second loans or home equity loans. So that uptick is the first uptick that became visible over the last few weeks or the later part of the quarter, and has carried into the c
Q
Sir, I have 2, 3 questions. One, if you could talk a little bit about the tenure of the TCV that gets closed at 700. So say, for comparison sake, Q1 '23 versus Q1 '24, how we should see the tenure thing? And second is related to the split of BFSI decline that we saw in 1Q. So what target mortgage and how should we see between regional bank, mortgage and core business?
Nitin Rakesh
So on the first question, there is no major change to call out in terms of the tenure of large deals. However, there is a little bit of drying up of shorter duration small deals, and that's tied to the discretionary spend pattern that we talked about. I think, as such, the seven large deals, the duration, the multi-tower nature, the transformation-type deals, all of that is fairly consistent and has felt fairly steady over the last 4 quarters. The only change to call out, as I mentioned, is the small organic growth type deals. For example, when you roll out a project or if you lose 2 or 3 peop
Q
A couple of questions. First, about the deal intake. I just want to understand the nature of competition, which we faced. For 100 million plus deal and I think another large deal, which you indicated, 40-odd million in Canada. So if you can provide some sense about nature of competition, and you indicated non-BFS. But if you can provide some sense about the type of work which we do, and if possible some of the industries where we are trying to provide offerings and whether it is part of Non-top 3 kind of focus areas in terms of some of the emerging verticals, which we indicated. Second questio
Nitin Rakesh
Manish, why don't you take the last 2 questions, and then I'll talk about the pipeline outside and the wins and the competitive intensity. Dipesh, Manish here. Taking the question on the cash first, the onetime is essentially three things. You would have seen in our balance sheet, our classification of non-current assets. That's a structured contract and the finance cost of delayed collection is baked into the commercials. But it does come up in the DSO and the receivables. And then there is a collection that was erroneously sent from the client of an amount close to USD25 million (SWIFT code
Q
Just 1 question. Nitin, is there any large client-specific issues still worrying you in any of your industry segments?
Nitin Rakesh
As I mentioned before, the metric that we are mainly focused on is wallet share within a customer and expansion of TAM in every large customer. So these are two things that we continuously focus on as we drive the account plans. If I focus on these 2 metrics, I don't see significant areas of concern that give us a pause saying, we need to double down or we are not really well-placed in any of our top accounts. Of course, it also depends on the environment that those accounts are going through. And in some cases, we've had certain client-specific issues that have kind of lingered on for a littl
Q
Just wanted to get a sense in terms of the USD700 million plus of deal flow. Any duration changes that you have seen versus earlier given that there were four 100 million-plus deals here? And the second question was in terms of our margin outlook as we go through the year, given that we have significant scope in terms of utilization, growth is also expected to improve. And the third one is on our Top 10 client cohorts because we've seen sharp declines there. So as a cohort, do you see that stabilize as you go forward and see a similar sequential growth that we're guiding for the overall compan
Nitin Rakesh
Ashwin, on the first question around duration, I think I just answered it a few minutes ago. Nothing to call out. The contract duration, multi-tower nature and transformation, all of that has been fairly consistent on the large deal side. So there isn't any significant change in any of those, that's the point number one. But I think a corollary to that was that we've definitely seen a downtick over the last couple of quarters in the smaller deals that typically do add up to in- quarter revenue and ACV. So I think that is tied directly to the cuts and discretionary spends and the lack of opport
Q
Congrats on the strong bookings. Just 1 question on the bookings. So I wanted to understand, if you can give a color whether these are wallet share wins? Or did we displace any competition? And second is, was there any change that you noticed in the closure timelines of these deals from the initial conversations to closure? What I'm trying to understand is, was there a bunching of closures or these were actually closed way before than you anticipated?
Nitin Rakesh
I think on the first question around displacement of competitors, I think I answered that in the context of competitive intensity. Given that majority of these were outside of Top 10, you can actually easily say that many of them are wallet share gain deals because we've constructed propositions and effectively eaten into somebody else's share of wallet because we've, in many cases, bundled change and run our transformation in these deals. There are deals, for example, the likes of Canada that are pure greenfield, new client acquisition deals where we were able to really construct a propositio
Q
Haresh, thanks for the confidence. We have stated the philosophy of maintaining margin in a narrow band and investing for growth. We believe that, that delivers a better return to our shareholders, given the growth multiplied by EBIT eventually is the EPS. We will continue to look at the avenues for investing while making sure that the margin remains in a narrow band. DocuSign Envelope ID: BBBBE627-86C7-414C-B7AC-066AEAB08347 Having said that, as the scale happens and as we grow, we believe operating leverage gives us a northward bias to the margins, and that's what's reflected in the expanded
Management
Q
Thank you all for your interest in Mphasis and your questions this morning. While the macro environment continues to remain uncertain, we are very pleased with the record breaking TCV as well as the large deal wins this quarter. And we continue to be cautiously optimistic. And at the same time, we'll continue to update you through the remainder of the year and look forward to seeing you all on the next calls.
Management
Speaking time
Nitin Rakesh
28
Moderator
12
Ankur Rudra
7
Manish Dugar
6
Mohit Jain
5
Nitin Padmanabhan
4
Kumar Rakesh
2
Dipesh Mehta
2
Sandeep Shah
2
Ashwin Mehta
1
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Opening remarks
Nitin Rakesh
Thank you, Aman, and good morning, everyone. Thank you for joining us today. Hopefully, we will all get an opportunity soon to meet in person. I trust you had the opportunity to review our earnings release documents. I would like to take time today to share with you our perspective on recent developments, markets, technology, people as well as highlight our quarterly performance and how this is setting the base for FY '24. Let me begin by showcasing the highlights of the quarter, especially as it relates to the various initiatives that we have been executing towards. One, we have set a strong pace of the deal closures with record TCV wins of USD707 million this quarter, providing a visibility of growth for future quarters. We would be double clicking on this in the slides ahead. Two, our vertical cohort strategy is showing encouraging results. Our vertically aligned, yet account-centric GTM units have aligned well since we announced the re- org design earlier this year, to create growt
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