Please note that this conference is being recorded. Before we begin, I would like to state that some of the statements made in today's discussion may be forward-looking in nature and may involve certain risks and uncertainties. A detailed statement in this regard is available in the Q2 results release that has been sent out to all of you earlier. I now hand over the floor to Mr. Nitin to begin the proceedings of this call. Thank you, and over to you, Nitin.
Thanks Ziko , and good morning, everyone. Thank you for joining us today. As you may have noticed in the opening slide, Mphasis has just turned 25 last month. A lot of you have been following us since our early days. On behalf of the management and the board, I would like to thank you all for your interest, investment, and camaraderie over the years. We look forward to the next 25 years of being a high-tech, high-touch, high-trust organization. Thank you again. I understand you may have had lesser time than the previous quarters to go through our MD&A. Hopefully, this call will help with the deep dive and answering any questions you may have. As we begin the second half of FY 2024, I would like to start by discussing a few macro trends before double-clicking on Mphasis performance numbers.
There are a few themes playing out in the market right now, namely, varied growth trends. There is a duality in growth across segments. BFS and insurance are moderating, while healthcare, utilities, and travel continue to have tech spends. On the discretionary client spend, clients want a transformation partner, and consolidation and cost takeout plays are dominant themes. Adoption of AI continues to be a strong theme. Gen AI is automating, augmenting, and accelerating multiple areas across service offerings. Additionally, we see relentless prioritization in the market. There is this construct of digital duality playing out. On one hand, there's extreme focus on spends, especially discretionary, and on the other hand, there's a healthy desire for continuous transformation and innovation, especially in application of AI across enterprises. Forward-thinking enterprises are strategizing to streamline their operations, scale their processes, and find means to conserve cash.
As the debt gets reshuffled, transformation partners are likely preferred over traditional vendors. Tech budgets are focused on quick wins, even as executives tend to be more pragmatic in these uncertain times. McKinsey's AI survey report states that leaders are automating most data-related processes, which can both improve efficiency in AI development and expand the number of applications they can develop by providing more high-quality data feed into their AI algorithms. In the past year, early adopter high performers have become even more likely than other organizations to follow certain advanced scaling practices, such as using standardized toolsets to create production-ready data pipelines and using an end-to-end platform for AI-related data science, data engineering, and application development that they've developed in-house.
Since we were founded 25 years ago, we've been relentless in our commitment to design and architecture, combined with our engineering DNA, allowing us to create a portfolio of cutting-edge offerings and services combined with domain expertise. This is reflected in our build-buy-partner strategy as well. Factors of our growth strategy are aligned around that of technology capability expansion, vertical focus, and geography expansion axis, increasing our repeatability of deal archetypes using the tribe and squad model, which we've discussed before. Additionally, we have been consistently building our leadership teams. We've added new leadership across geographies such as Canada, as well as in select verticals such as insurance, while continuing to strengthen our coverage in our strong verticals like BFS. We are very happy to welcome Ayaskant Sarangi, who joined us earlier this week as our CHRO.
We've partnered with several hyperscalers as well as specialized market-leading AI platforms and solutions companies such as Kore.ai, WorkFusion, Databricks, et cetera. We expect additional deal archetypes as we expand on these offerings. While you already know of our past acquisitions, this quarter, I would like to tell you a bit more about Silverline and invite their CEO, Gireesh, to share his perspective in a few minutes. Silverline is Salesforce Summit partner, the highest tier in Salesforce Partner Program. Silverline's deep Salesforce expertise and scale, combined with our execution muscle and reach, will not only assist us in designing next-gen digital capabilities, but will also help establish us as a dominant player in the Salesforce ecosystem.
This acquisition will complement our key strategic initiative of driving the intersection across customer experience transformation, contact center modernization, and conversational AI-enabled automation, thus enabling tech transformation to meet the evolving and dynamic needs of our customers. With that, I invite Gireesh to share details on the company he's founded and built.
Thank you, Nitin. The Silverline team is very excited to now be a part of Mphasis, and we are already hard at work aligning our teams to create value and drive innovation for our mutual clients. As you have mentioned, Silverline offers digital transformation consulting services on the Salesforce platform. We are a U.S.-based consultancy and a Salesforce Summit partner, which is currently the highest tier in the Salesforce partner program.
With over 400 consultants around the world, we guide clients through every stage of their digital transformation journey with consulting and advisory services, implementation and managed services, and specialty platform capabilities. We are known for our expertise in the full suite of Salesforce technology and for our deep industry knowledge. Together, these capabilities allow us to help organizations take a data-driven and technology-focused approach to better connecting with and serving their customers. With nearly 15 years of performance history, we have delivered thousands of successful transformations and bring to Mphasis deep Salesforce ecosystem relationships, a talented team that is globally recognized for its Salesforce expertise, and expansive industry knowledge in key verticals, including financial services, retail, healthcare, life sciences, and media and entertainment, many of which naturally align with the industry focus at Mphasis. Our positioning in the Salesforce ecosystem is particularly powerful.
In addition to operating at the highest level of partner accreditation, we were part of the Salesforce Ventures investment portfolio for over 10 years and have built strong, long-lasting executive-level relationships. These deep connections to Salesforce power our growth and extend our influence in the ecosystem. We are a close partner to Salesforce in its industry's first strategy, and Silverline has been one of a select group of product launch partners for Financial Services Cloud, Health Cloud, and Media Cloud, and are a preferred partner to several key ISV industry solutions. All this manifests in benefits such as enhanced pipeline generation through joint client pursuits, strong delivery partnerships with Salesforce, and product development insight through our involvement as Partner Advisory Board members.
For Silverline, as the Salesforce ecosystem continued to grow and the opportunity for AI and data-driven innovation increased, we saw an opportunity to accelerate our own growth journey. Mphasis was the natural place for Silverline to do that. As part of Mphasis, we immediately expand the breadth of Silverline's capabilities and the global reach of our insights, and together, we align complementary capabilities that will help us build even more compelling digital experiences for our combined set of clients. Silverline's digital transformation approach with Salesforce matches well with the service transformation approach of Mphasis. With this combination, Mphasis now has access to the fast-growing Salesforce ecosystem for continued growth. Specifically, we see three vectors to drive growth through our combined capabilities. First, we will accelerate Silverline's core growth strategy as we continue to support our current clients and engage more organizations in digital transformation work.
Second, we will bring our Salesforce services to the impressive roster of marquee clients at Mphasis. Third, Mphasis and Silverline will explore new growth opportunities as we go to market together in this AI-led revolution. As we look to the future, we feel the possibilities are endless. Our teams have a shared vision for success and are already hard at work making this a reality. I'm excited for our people, for our combined set of clients, and for the continued growth at Mphasis. Thank you, Nitin.
Thank you, Gireesh. I'm personally thrilled with the opportunity of artificial intelligence to maximize business outcomes. At Mphasis, cloud and cognitive-led solutions have been central to our unique Front2Back approach to transformation. The Mphasis.ai business unit delivers various benefits to enterprise clients that include offerings that drive business outcomes, starting with the AI advisory unit to help assess and identify key AI interventions through complete archetypes such as contact center transformation, customer experience transformation, et cetera. Further, our clients have access to an array of Mphasis' patented AI assets, with over 250 ready-to-use models available on the hyperscaler marketplaces and frameworks created at the Mphasis Next Labs. These frameworks can be seamlessly integrated into an existing systems and processes.
Access to state-of-the-art conversational AI platforms, powered by Generative AI technology and large language models, transform customer experience management, employee engagement, as well as drive operational efficiency and increase NPS scores. We've also turbocharged the Mphasis partner innovation ecosystem, which has enrolled over 50 domain-specific startups, including those that are AI-focused and can accelerate the co-creation of robust go-to-market solutions for enterprises. Examples from the business unit suite of intelligent service offerings have now been created as additional new archetypes in true Mphasis fashion. Contact center and customer experience transformation is a solution that helps enterprises, for example, deliver great customer, agent, and employee experiences, reducing digital leakage and delivering operational efficiencies by introducing AI-based interventions into the ecosystem. In addition, our early investments and partnerships in AI are bearing results. We see 29% of our TCV being AI-led as of the first half of FY 2024.
into these services. Almost all our pipeline continues to be deal-driven, archetype-led, and is up 2% sequentially and 33% year-over-year, despite record conversion from pipeline to new TCV in the first half of FY 2024. Our pipeline is also well distributed across verticals. BFS continues to generate a high share of pipeline at 38%. However, the other verticals have also increased their share now to 62%, suggesting that our investment in growth diversification is working. We've also seen a shift towards large deals in the pipeline, suggesting that digital transformation and accelerating digital adoption continue to be core themes for our clients.
Our pipeline generation in some of the smaller verticals, such as healthcare, has been particularly robust, with pipeline in this vertical being 3x on a YoY basis. More than two-thirds of our pipeline continues to be application-centric, further reflecting the strength of our application transformation and modernization engineering practices. Pipeline is also well distributed across key themes such as data, modernization, cybersecurity, agile ops, and platforms. Expertise in these themes continues to be resonant in our Tribes, as we've discussed with you in the past. As I mentioned earlier, our TCV for the first half is at $961 million, one of the highest levels. There are a few things that I would like to highlight further on this aspect. TCV wins in the first half include 10 large deals, of which three of them were won in this quarter.
Six of the large deals in the first half are in verticals outside of the BFS, which shows that our vertical cohort strategy is working across the board. This quarter, we are also pleased with the deal momentum revival seen in the mortgage business after several months. Notably, significant TCV wins also continue to be from beyond our top 10 accounts and are well distributed between our various service lines. More than 70% of our deal wins continue to be powered by next-gen technology adoption. We've mentioned in our previous calls that we are seeing a lengthening of sales cycle in converting pipeline into TCV and TCV into revenue due to greater scrutiny of the tech spends. While the conversion of pipeline into TCV seems to have normalized, we note that TCV to revenue conversion cycle is still elongated and somewhat sluggish in a few deals.
We expect further improvement on this during the course of FY 2024. We continue to push for revenue growth, which is anchored in a strong client mining model and tech-led offerings. Our second quarter FY 2024 revenue came in at $398.4 million, marginally higher over previous quarter in constant currency terms. We continue to be impacted by overall macro environment, of course, as well. Our direct business accounted for 95% of our overall revenue in second quarter 2024. The mortgage business declined sequentially by about 7% in this quarter. The contribution of Digital Risk, our mortgage BPS subsidiary, now stands at approximately 6% of overall revenue in Q2, versus 11% a year ago in Q2 of FY 2023.
As mentioned, we see incremental stability in this segment based purely on the market share gains from new and existing clients, who are increasingly looking at best-in-breed solution providers for a combination of cost takeout and transformation programs, giving us visibility to an order book that signals a bottoming in this segment without calling for a change in the macro conditions. While we expected some of these deals to be revenue accretive in Q2, we saw some push out of conversion due to transition and macro timelines towards the latter part of Q2, and we are now expecting to see that revenue pick up in Q3. Our direct revenue increased by 0.3% sequentially in constant currency terms, and declined by 8.9% YoY in Q2 FY2024.
Direct ex-mortgage increased by about 1% quarter-over-quarter in constant currency terms, continuing to reflect the relative tightness in discretionary spends in some of our clients on the macro overhang. Our anchor geography, U.S., declined 11.9% direct YoY and declined 2.2% sequentially, as remnants of macro overhang in the banking sector persist. The EMEA region and the rest of the world grew YoY basis as well as sequentially. We've seen good client wins and traction there. Our core service line of enterprise applications, consisting of 70% of revenue, marginally declined by 0.3% sequentially in constant currency terms in the direct business, impacted by tightness in discretionary spending in some of our clients and select pockets in BFS.
The BPS segment, which has suffered from the downturn in the mortgage segment over the last four quarters, declined 26% YoY, but grew 4% on a sequential basis. We see further potential for real gains in this service line. Moving to vertical performance, our mainstay vertical, BFS, was down 20.5% YoY on an overall basis, weighed down by the mortgage business. Excluding the impact of DR., BFS declined 11.4% YoY. We saw good growth in the TMP vertical, with our client wins in recent quarters ramping up well. Similarly, our smaller verticals in direct, such as healthcare, are growing quite well, as reflected in the 6.5% YoY growth in Q2 in the other segment. Pursuant to a merger between two of our top 10 clients, the client metrics of previous periods have been accordingly restated.
Our top 10 accounts declined 9.3% year-over-year on an LTM basis, going down by the mortgage business pressures in the past few quarters and tightness in discretionary spends. Note that our top 10 clients, ex the mortgage business, remained flat YoY, despite the pressures from regional bank crisis earlier this year. Our 11 to 20 client segments marginally increased at 0.3% YoY in a tough macro environment. As mentioned earlier, the contribution of Digital Risk now stands at 6% of overall revenue in Q2 versus 11% a year ago. To ensure scalability and facilitate the next phase of growth, a realigned vertical GTM structure was implemented in April 2023 to align the GTM organization and drive better sales synergies and enable scalability and repeatability with a vertical focus.
Results of this are bearing fruit as we see our clients from 21 to 30 grow at a healthy pace, 22.5% on a YOY basis. Our new client acquisition revenue continues to grow double digits as well. Client mining stats remain steady, both sequentially and on a YoY basis. The YoY movement in clients in the $75 million and $100 million+ categories is purely due to mortgage softness on a YoY basis. We expect this to come back as the mortgage spends resume. We are using this opportunity to continue to consolidate our wallet share gains and our market share with our mortgage clients. Coming to our financial metrics, our margin philosophy affords us the flexibility to manage our profitability in the face of revenue headwinds.
This quarter, our EBIT margins stood at 15.5%, within the stated margin guidance band of 15.25%-16.25%. Reported operating profit declined 5.8% YoY due to revenue headwinds and improved 1.4% sequentially. Losses in cash flow hedges impacted margins in Q2 by 60 basis points. Our EPS of INR 20.8 for this quarter is a decline of 1.1% sequentially, despite higher operating margin, mainly due to reduction in other income due to lower investable surplus on account of dividend payout. Cash flow generation for the first half of the year was at $120 million, which is 100%+ of PAT for the half year.
We generated highest ever quarterly operating cash generation of $86 million in Q2, which is 180% of our net profit. Adjusted for the one-timers of $21 million of delayed Q1 collections, the cash generation in Q2 would be $65 million, which is 137% of our net profit for the quarter. Our DSO also improved by eight days to 70 days at the end of Q2 2024. While many of the deals we saw last quarter have converted, there are still some deals that are taking time from a conversion standpoint. In Q2, we remained focused on ensuring revenue stability with margin expansion theme. I'll leave you with a few points. Macro-driven overhang continues in select verticals, while we focus on the micro and account-specific efforts.
Despite multiple pressures, we saw stability in sequential revenues, driven in part by the visibility from the highest ever TCV closure in the first half at $961 million. Further, we saw continued stability of DXC segment while making gains in the mortgage business order book, setting us up for subsequent quarters. Our efforts towards diversification of TCV and pipeline beyond BFS and non-top 10 clients continues to bear results, while BFS pipeline also grew at 21% YoY. AI-centric deal propositions are paying off, accounting for nearly 29% of the total TCV in the first half, driven by continued acceleration in the Mphasis.ai business unit, as well as continued investments in capability building across categories, including the recent acquisition of Silverline, as well as our strategic partnership on professional services at WorkFusion.
Our market share continues to be robust with continued market share and consolidation deals in play with most of our top clients. We've delivered expanded margin despite revenue challenges. Sustained focus on utilization, productivity, and offshore leverage have been the key drivers of this phase. As we come to the remainder of the year outlook, we continue to take a forward-leaning stance on tech, on our tech-led positioning. We have a strong pipeline entering the second half of the year, led by AI, Cloud, and transformation deals. We expect sequential revenue growth through remainder of FY 2024, driven primarily by the fact that the mortgage segment has bottomed out with signs of order book pickup. While there continues to be an overhang from the regional bank crisis, we also have seasonality trends and macro conditions driving slower uptick in revenue in Q3.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Yeah. Hi, good morning, Nitin, Manish. First, so Nitin, I think the feedback is that I think your voice is very muffled, so I don't know if it's just me, but it just sounded a little muffled and difficult to catch things. My first question is that-
Sorry to interrupt, Mr. Nitin. May we request you to use your handset, please?
I am on a handset.
Okay. If you could speak louder, please.
Is it better?
Thank you.
Yeah, I think the issue is on your side, Nitin.
Yeah.
Because I-
Is it better?
I'm having difficulty hearing you as well, clearly.
Oh, really? Okay. Okay. Okay, for the quarter, if you could, one, characterize the weakness that you saw during the quarter. Was it a surprise? So that's one. Second is the... you have sort of restated the top client contribution numbers or some context on that. Finally, from an H2 perspective, do you think the leakage on the book will still be high and revenue accretion from the deals... or do you think the revenue accretion from deals can sort of compensate, and H2 can actually be reasonably stronger than H1? Right. So those were the three questions.
I think on your first question on whether it was a surprise, I think there were a couple of deals that we thought would pick up sooner than they are, primarily driven by either additional scrutiny or, in some cases, ask from the client for a longer ramp-up period, given just the transition timelines that we estimated versus where they want us to be. That actually was very evident in a couple of deals, including one in mortgage. No loss of revenue, no loss of share. I think it's just a timing phase-out issue. You know, what should have ramped up in August, September, is probably gonna ramp up in October, November, December timeframe.
From that perspective, I think the timing of that push out definitely had a little softer impact on the quarter. As such, we still made up and more for some of the other discretionary spend cuts, you know, the leakage, as you called out. I think in select pockets, as I called out in BFS, that tightening is fairly evident across the industry. We do believe as we continue to convert order book into revenue, which means the slower deals for the first half, we should be able to make up for a fair bit of that.
Keeping in mind the seasonality effect in Q3, I think we are still reasonably confident that we should be able to deliver sequential growth, but we believe it will actually pick up as we get out of the seasonality impact and accelerate further into Q4. In terms of client restatement, as I mentioned in my script, two of our top 10 clients merged, so we had to restate that with our, you know, with our top 10 client metrics, and we've gone back four quarters and given you the analysis for you to be able to do a like-to-like comparison. From that perspective, I think that's probably the best we could do to give you a very similar feel so you can actually compare numbers.
Second half.
Okay.
Second half, I think, are in Q3 and Q4, you know? Yeah.
Yes. Essentially, second half should, on a progressive basis, be better.
Yes.
Obviously, furloughs. You think furloughs are, compared to last year, how does it look? Because last year was bad. You think this time it's better, or?
You know, again, hard to.
Or more in terms of, you know.
Hard to predict, comparatively. You know, we definitely know that this year, this has been a tougher year. Segment-wise, last year, the furlough impact was in different segments than I think it's gonna be in this year. Because last year, I think high-tech was the first one to call a furlough. This year, it seems like BFS is probably the leader in the pack when it comes to having some impact. I think we are, at this point in time, focused on making sure that we are able to minimize that impact. We've taken certain estimates in our own visibility, and, you know, we'll hopefully be able to manage that through additional business ramp-up, as we talked about, and still show sequential growth.
Sure. Okay, that's helpful. This one, last one. I think in the last quarter, we spoke about capacity buildup in the home equity business. That should sort of, you know, lead to growth in Q3. For that business, if you look at the numbers, it doesn't look like the headcount has sort of improved. Just wanted your thoughts there.
Yeah.
The one that you mentioned is sort of pushed down, or?
Yeah. Yeah, I think that's kind of what's driving that one particular program that we talked about. I think what's happened since further update is that we've seen actually pretty good deal closure in that segment in Q3... In Q2, that should result in some uptick in Q3 as well. Obviously, as I mentioned, that there is a certain transition and ramp-up timeline that will also go into Q4. Q3, Q4 definitely look better sequential quarters for the mortgage business. Again, I want to reemphasize that this is not a call on the macro. We are not saying volumes will pick up. We think the interest environment has, you know, bottomed out.
This is purely based on the fact that we've gone and we've been able to open new opportunities, close deals with customers that are now starting to think about a best-in-breed provider who can actually give them a transformation plus a cost lift. This is really a pure market share. Our biggest competitors in the space, you know, are either not able to provide that same level of transformation and cost play, and in some cases, they're still captive to our customers, and hence, we are a pretty credible alternative for them to be able to use in, you know, in a downturn like this. I think it's purely based on our deal wins and our order book versus being based on the macro. I just want to make sure that that was clearly understood as well.
Okay. Thank you so much, and all the best, Nitin. Thank you.
Thanks, Nitin.
Thanks, Nitin.
Thank you. Our next question is from the line of Sulabh Govila from Morgan Stanley. Please go ahead.
Hey, hey. Hi, thanks for taking my question. I had three questions. First is on the banking. Nitin, just wanted to understand, you know, how are we internally thinking about it, especially within the top 10 customers? When do you think, you know, things would start recovering? I know there are multiple moving parts, but given there was some excess supply created at some of the banks, and there's a discretionary cut which is offset by some of the deal wins that are happening. Just trying to understand, in your internal estimates, how you're thinking about, you know, the banking, especially from a top-down perspective. The second question is on the supply side.
There's a moderation in headcount, but a much sharper decline in utilization despite organic revenue not declining as much this quarter. Just trying to understand, how should one look at that? The third question is on the outlook piece. This progressive growth, sequential growth in Q3 and Q4, would that hold true on an organic basis also? What's the impact of M&A charges that, you know, we are thinking about, given that guidance has some of it excluding M&A charges?
Okay, let me take those in that order. I think you talked about growth view for banking top 10 customers, and you already called out for a couple of the answer items that I was gonna talk about, which is discretionary spend cut, primarily driven by overcapacity at the banks. That's definitely playing out through 2022 and later part of 2022 and most part of 2023.
Hard to call when that will shift or change, except that I think this concept of an annual budget exercise that has started at the banks didn't quite hold true for 2023, because many of them, given the uncertainty in the macro and the promise of recession that we are still waiting for, has kind of given a lot of pause to that budgeting exercise, and many of them went into a monthly budget model itself. I think it's very hard to call what happens in that segment.
We can't control the macro, so we are focused on the micro, which is account-specific actions, not just in top 10 accounts, but also in accounts that we've acquired in the last two or three years, where I think we are more of a challenger, a lot less to lose, and we can be a lot more disruptive with our deal archetype. Net-net result is, you know, of course, seasonality of the quarter will definitely play up there, but we do expect, we do think that we continue to focus on account-specific actions. Hopefully, the regional banking headwinds have kind of stabilized, so we should definitely see stability in that segment this quarter and potentially growth in the next quarter, given the order book again, and any call that out as well.
On the supply metrics, headcount, utilization, revenue correlation, given that more than 50% of the revenue is really managed outcome of some form, there are certain milestone-based deliverables that lead into the revenue number. Of course, the headcount metrics also, the headcount to revenue correlation also gets impacted by on-site offshore. You can see our offshore percentage is up 4%. At the same time, we've seen some pickup in these transformation deals that definitely played into that revenue to headcount model. I think utilization dropped marginally, driven primarily by, as I mentioned, late quarter actions on the headcount and the billability. I think from that perspective, not too much to read into or call out into that.
In a way, it gives us a little bit more room to grow with the current headcount and ramp up as we start some of these deals from a delivery standpoint. I think we'll continue to keep a very close watch to see how much room we need. We are still fairly forward-leaning on pressure reduction and pyramid corrections. I think we are fairly well equipped to handle that change of supply-demand dynamic. On the outlook, I think if we look at the organic number, we definitely think we'll be able to record growth in Q3. The extent of that will depend on how much seasonality plays in. You know, the outlook we gave you was not inclusive of the inorganic actions. Of course, the inorganic number will show up in the reported numbers, and that will definitely, you know, give a boost to the overall number as well.
Wait, "The last question, Sulabh, on the M&A charges. Since we just concluded the transaction, we are going through the purchase price allocation discussion, and it will govern how much is the cost of amortization. Other than the transaction cost, that will come into the P&L and the retention bonuses plus the synergy expenses. Excluding the acquisition charges and the M&A charges, our belief is that the margin will be sustained or expanded. If you were to look at the margins without the M&A charges, it will look as an expansion in the coming quarter as well. Currently, the estimate of the M&A charges. We will get the confirmations once the Purchase Price Allocation discussions are over, and we'll be able to communicate that once that is done.
Sure, sure. Just a quick follow-up, Manish. If I understood this correctly, the estimate of purchase price allocation impact is 0.7%-0.8%?
No, the current estimate of total charges, excluding, you know, what is the transaction cost, is 0.7-0.8, which includes the cost of retention bonus, the synergy investments that we will make in the initial period, plus the amortization of Purchase Price Allocation. However, that will get fructified once the PPA is complete.
Understood. Thanks for taking my question.
Welcome.
Thank you.
Thank you.
Our next question is from the line of Manik Taneja from Axis Capital. Please go ahead.
Hello, and thank you for the opportunity. First of all, was a clarification question, trying to understand the contribution of the Silverline that we acquired at the end of last quarter. And if that number is actually driving a strong sequential growth on the TMT side. That's question number one. The second question was with regards to getting some qualitative commentary in terms of the revenue growth trends that we've seen for us in the logistics and the transportation business, along with that also on the BFS business, ex of DR.
Manik, on your first question on the Blink transaction, you know, as we spoke about it last quarter, the idea was to acquire the capability that we can utilize for all larger customers at Mphasis. A lot of the client and the revenue that we acquired were not necessarily something that we intended to continue with. So while you would have seen a LTM basis reported number of the entity that has been acquired, what has actually got consolidated in our books does not have any significant material impact. Obviously, since we consolidated it full quarter last quarter, this quarter anyway is having no impact of any growth of that over the previous quarter. So you want to talk about the logistics one?
Yeah, I think on your question around logistics and travel, I think this is a tale of two cities. While the travel piece has actually done fairly okay, especially the airline business has actually grown quite well, there is obviously more work to be done from a macro perspective for us to see growth come back. We've seen signs of stability. The part of the reason why we are baking in some forward-looking estimate on our sequential growth is also coming from the fact that we've definitely seen, I would say, pretty good order book buildup, you know, in that segment as well, including the logistics and both logistics and travel sites. I think sequentially, you know, things will probably look better as we go forward.
The pace of growth will depend on how quickly we are able to convert those to revenue as well. At this point in time, I think stability to cautious optimism is the best way to look at the logistics and travel segment.
Sure. My last one was a clarification with regards to segmental margins that is reported for the TMT vertical. They've gone up to almost 39% in the current quarter. Is there some element of both one-time revenue that's driving this strong uplift here? Are these segmental margins sustainable?
Manik, as you would have noticed in our financials, we have disclosed that there has been a contingent consideration that has been, you know, reversed. As you would expect, there are bonuses that are planned and they are dependent on delivery of certain numbers. Since we believe that we are going to fall short of what the potential opportunity of 100% payout was, we did a retake on what that payout will be, and the excess that we were carrying has been reversed. A large part of that actually, you know, was in the TMT vertical, and that's what's reflected in the margin uplift.
Sure. Thank you. I'll get back to you soon.
Thank you. Our next question is from the line of Ankur Rudra, from JP Morgan. Please go ahead.
Hey, thank you. Hi, Nitin, Manish. Just a quick question on the, you know, visibility of growth and where the confidence is coming from. If the macro conditions remain unhelpful in terms of banking budgets and, you know, pricing rates, do you think that your comments or the performance in the period might change? There's a risk to, you know, what you expect in terms of growth recovery. That's part one. Second part is you can talk about how you feel the budgeting conversations on the monthly or quarterly budgeting cycle is happening with your top customers on the banking side, and any early indications of how C.Y. 2024 will pan out. Will it be similar to this year, or do you think there's a chance of it being better or worse?
Ankur, on the first one, as I mentioned, right, we are not taking a call on the macro when we talk about the outlook on the business, because this is a very micro, bottoms-up, account-by-account, pipeline, TCV, order book view. It is very hard to take a call on the macro. If the macro worsens like it did in the middle of last quarter, then of course there's always gonna be an uncertainty, because we are definitely in a time where it's hard to, you know, to have a forecast. I think the best of central bankers are struggling to figure out next moves on the macro front. The 10-year spike has obviously surprised everybody this week as well. I think it's very, very hard to take a macro call, and we are not taking a macro call. We are...
Based on what we see today, based on the visibility we have from our not just top customers but also, you know, other segments, we are kind of giving an estimate. I went through a fairly detailed analysis of what's going on in the mortgage business. That's a good example of how we are making the visibility from an order book perspective versus from a macro perspective. There is definitely and at least some level of visibility on the fact that there is work to be done that cannot be pushed out for long periods of time. End of the year, budgets will obviously get extinguished and re-budgeting of 2024 will kick in.
We are seeing, at least in some pockets, you know, customers taking decisions to actually execute programs. I wouldn't quite call it a year-end flush. It's not that prominent, but it's definitely some level of decision-making has moved on, especially for programs that require them to move, you know, that will help them take either cost out or integrate platforms that they don't need to carry into next year. On the budgeting front, too early to call. Also a little bit more nuanced, especially on the banking side. I think if you think about multiple segments of banking, and I think I talked about it last time as well, very highly capital markets focused businesses, I don't think there will be an uptick in spend.
If anything, they'll continue to watch the environment very closely, watch the deal flows, watch the M&A activity, capital market activity, and that will drive a lot of the incremental decision-making. On the consumer front, on the consumer banking and asset, wealth management front, things are a little bit better because I think there is continued investment from almost every bank making a pivot into entity-based businesses, wanting to go away from transaction-based businesses to fee-based businesses. That's where we are seeing continued interest from banks in helping set up those platforms for wealth and asset. I think it's a little bit more nuanced than just having a singular view of banking budgets for next year. I think, in general, the larger universal banks probably are better placed to weather this.
Of course, individual, you know, bank ratios will determine what budgeting they will carry in. I think from the point of view of, you know, the monthly versus quarterly versus annual cycles, I think it's hard to say what each of them will do, given just the uncertainty they are themselves dealing with. Expecting spike in interest rates that already has happened to lead into deterioration of consumer, so obviously provisioning plays in. If it doesn't play out, reversal will happen and, you know, budgets will open up again. It's a lot of moving parts to that equation.
Thank you. Appreciate the color. A quick question on the signings. While first half is very strong, if I just look at the quarter, this seems to be slightly on the softer side compared to, you know, what we've been used to see from.
Sure.
From you for the last six, seven quarters, and slightly in contrast with so many of your peers who've reported, you know, relatively improvement in momentum this quarter, is this a function of timing, or is this a function of maybe a lack of signing in banking, which is a much bigger exposure for you?
Ankur, just to give you some color, almost half the deals this quarter are in banking. The lumpiness of large deals is what is driving the $700 million-$250 million swing. Also, as you can expect, there is a certain tenure or deal has to stay in the pipe for it to actually go from origination to conversion. Because we converted a bumper quarter in Q1, which we are very pleased with, because that gives us visibility into, you know, a good order book. I think as we normalize and come back in, I think you will see the trailing 12-month number will continue to actually be a good indicator of that versus just the quarterly number.
Okay. This last question on Silverline. It looks like an interesting acquisition, best of luck. Maybe elaborate a bit more on the cross-sell opportunity here. Is this more on your banking customers, or is it for the rest of the portfolio? If you can comment, Manish, on, you know, the impact on margins and, you know, earnings, you know, creation et cetera, over the next, you know, this year, next year, et cetera?
Ankur, I'll address the first part. I think the impact is definitely synergy opportunities with almost every segment of our customers because given the strength that Silverline brings in, and Gireesh talked about it in great detail around the product visibility into the product council. More importantly, the role they've had in the vertical cloud strategy at Salesforce. This actually makes it very interesting for not just banking, but even, you know, non-banking customers for us, especially Health Cloud. You know, we don't do a lot of media, so this definitely gives us a tip, you know, tip of the spear on the media side of the house, and you've seen we've acquired some decent customers along with the acquisition in the media space. Tier one media companies are in the client roster there.
Definitely capability accretive, acquisitive, accretive. It is definitely leadership accretive. We are very pleased with the level of leadership and the caliber of leaders that come along with this. You know, we are definitely, you know, trying to make sure that it continues to be growth accretive because we are opening a TAM that we were not really that well positioned in. You know, we had an existing Mphasis Salesforce business, but it was not quite as deep as what Silverline brings to us. Finally, I think there is a very large ecosystem on the customer experience transformation side that this can unlock as well.
If you include what we've done over the last two years between Blink, you know, the whole contact center modernization approach, an additional layer embedded into it, and the Salesforce, you know, the S/4HANA platform, there's actually a pretty strong synergy there from a large deal creation as well.
From a P&L impact perspective, Ankur, Manish here. There are, as you would expect, three things that need to be considered. One is, you know, the intangible and the amortization of the intangible that gets frozen once we have the purchase price allocation done, which is in progress. Second is the investment that we would make in the first 90 and 180 days to make sure that the integration program runs perfectly smoothly for the synergy benefits to get realized, revenue synergies as well as cost synergies.
Third, you know, cost that has been incurred for the transaction, including some of the retention bonuses that, you know, we want to make sure keeps the management and the leadership team of Silverline excited. Current view of all of these expenses put together is in the zip code of 0.7%-0.8%. However, you know, we will know once the PPA is done in terms of exactness of what that number is.
Appreciate the call. Thank you. Best of luck.
Thank you.
Thank you. Our next question is from the line of Dipesh Mehta from Emkay Global. Please go ahead.
Thanks for the opportunity. Two question. First of all, I think you indicated.
Sorry to interrupt, Dipesh Mehta. May we request you to use your handset, please?
I'm using handset. Can you hear me?
Yes, sir. Please go ahead.
Yeah. Implication, I think you indicated two of top 10 client mergers . If you can help us understand implication of this thing from near-term to medium-term, from growth potential perspective, because their tech spending might be now combined, and it has some implications. If you can provide some sense about it, integration, initial benefits, then medium-term, some kind of negative implication. Second question is about, if I look, we used to give correlation between deal intake and revenue. It used to be fairly high for us. If I look for last few quarter, it is not playing out that way. Your TTM deal intake is 30% higher, revenue growth is still in the negative territory. If you can help us understand how one should think about it. Thanks.
Dipesh, Manish here. I'll take the second question first, which is the correlation between the deal closures and revenue. As you would expect, the correlation coefficient also signifies renewal of the business and no runoffs. Two primary things that has been impacting the renewals. One is what's happening in the mortgage business, and, you know, there, while it does not so much reflect in TCV closures, because most of the revenue growth comes from volume increases, the same thing happens on the negative side as well. That volume decline has had a significant impact on runoffs, causing the mortgage business to come down from 11% of revenue last year, same quarter, to 6% this quarter. You know, that has a big impact on the correlation coefficient.
Other than the fact that a lot of small discretionary budgets or spends that were being, you know, that were coming in, has stopped coming in or has significantly reduced because of all the uncertainties that are in the environment. Especially in the banking segment, because of the regional banking crisis as well as the bank sitting on larger than required headcount. You know, that also means that the renewal rates are much lesser. The same thing will reverse and reverse to maybe more than 1%, you know, more than one correlation coefficient once we see these volumes come back. As Nitin mentioned, we are not factoring in any macro changes or any changes in interest rates for us to give that guidance at this point in time. But if and when that happens, you know, it should start reflecting in the correlation coefficient as well.
On the first question, Dipesh, on combination of customers and budgets going forward, I think we are not thinking out that far because right now we are focused on monetizing the opportunity that this current merger presents to us, because there is a fair amount of integration spend that will be unlocked. As we obviously, you know, get through the integration program over the next few quarters, I think we'll continue to reassess how we stack rank and what our wallet share is and how we can unlock new addressable markets. I think at least for the short to medium term, I think this is a little bit more of an opportunity than a threat, purely given just the fact that, you know, the programs are now starting to kick in. Good.
Thanks.
Thank you.
Thank you.
Our next question is from the line of Sandeep from Equirus Securities. Please go ahead.
Yeah, thanks. Thanks for the opportunity. Nitin, is it fair to assume that there could be a sizable growth push from Q2 to Q4 because of lot of TCV in the order book which is waiting to convert from TCV to the revenue? Is it fair to assume that?
Yeah, I think that's part of the reason why we are talking about, you know, acceleration in growth as we proceed through Q3 and Q4. You know, definitely some of it is linked to the order book, and some of it is linked to the conversion. As the sluggishness, you know, eases off, based on not, again, any macro call, but based on just the fact that we stay very focused on converting that to revenue, I think some of that will definitely aid in the scale win.
Okay. Okay. Manish, just wanted to understand how to model the hedge losses in the revenue line. How will it look like entering Q3? I do agree FX has been immaterial to the revenue, but if you can still quantify the revenue contribution in second quarter.
Sandeep, you know, we have been watching the premium that exists in the hedges as we, you know, go forward. You know, as you would know, it used to be in the 4%-5% range, and it is now at 1%-1.9%. That essentially means that we have been relooking at our hedge book. We have reduced it from what we would have had around 75%-80% covered to around 40%, 50%, 55% covered. Every quarter, we are getting the benefit of higher exchange conversion rates. For example, this quarter, we were able to convert at INR 82.5.
Because the closing exchange was at INR 83, which was almost INR 1 higher than the previous quarter, we still ended up having hedge loss in our books. It's an opportunity loss. We could have gained more if we had not hedged at all. We still believe, you know, from a principle and philosophy perspective, certainty of currency and a sustained policy of, you know, cover of exchange, at least for next four quarters, and then the following four quarters on a reducing percentage basis is the right strategy to adopt. We might be having a negative hedge loss at this point in time because of significant volatility and a depreciation of a rupee.
If it continues to be at the current levels, we expect that maybe another couple of quarters, we should be back to hedge profits with a reducing hedge loss on a quarter-over-quarter basis. To your question on OpEx, you know, like we said, it is not a material number, and we would prefer not to give a number in terms of what it has actually come into the books. It has been consolidated for the full quarter, and we have taken calls on what of it we want to continue and what we want to take haircut on.
Okay. Likely consolidation date for Silverline will be October or maybe starting November?
Based on the principle of convenience accounting, while the signature happened and the closing happened on the October 12th, we would consolidate effective October 1st.
Okay. Thanks and all the best.
Thank you. The last question is from the line of Abhishek Shindadkar from InCred Capital. Please go ahead.
Hi, thank you for the opportunity. Just two questions. The first one, you know, Nitin, we had called out strong traction in Canada, both from a deal win and a pipeline perspective in the first quarter. You know, given the recent challenges, do we, you know, any early indications in terms of, you know, potential impact of processing visa or, you know, delay in transitions? The second part to it is, you know, it seems like the acquisition, Silverline, you know, has a subsidiary based in Toronto. Any color in terms of what's the exposure to, you know, public services or, you know, to the business of Canada in terms of geography? That could be helpful. Thank you for taking my question.
Sure, I think you're absolutely right. We've seen massive expansion in both TCV wins and pipeline coming out of Canada. I think we talked about the fact that we sold more business in a quarter there than we had for eight quarters in terms of revenue. I think that deal momentum has continued, both in terms of pipeline, and we expect that to also continue in terms of closure as we go through the remainder of the year. Given that, at least from an Mphasis standpoint, our exposure to public services, public sector is fairly minimal. That hasn't really shown up in any major dislocations of existing ongoing deals or conversations. Also, given that the sensitivity will be higher if there is a pause or stoppage in immigration services in Canada.
So far, that hasn't happened yet either, but we are keeping a close watch on it. I think at this point, no major red flags to call out. Based on what I'm hearing from Gireesh, I don't think there is any major impact coming out of the same issue in Silverline's Toronto subsidiary either.
Great. Thank you for answering my question, and best wishes for the rest of the year.
Thanks, Abhishek.
Thank you. As there are no further questions from the participants, I now hand the conference over to Mr. Nitin Rakesh for closing comments.
Thank you all for interest in Mphasis and your questions. While the macro remains uncertain, we are cautiously optimistic, focused primarily on converting our TCV, our pipeline, and partnerships, and we are very, very focused on execution. Happy Navratri to all of you and your families. Have a great weekend.
Thank you. On behalf of Mphasis Limited, that concludes this conference. If you have any further questions, please reach out to the Mphasis Investor Relations at investor.relations@mphasis.com. Thank you for joining us, and you may now disconnect your lines.