Thanks for joining the Mphasis Q2 FY 2023 Earnings Conference Call. I am Aman, your moderator for the day. We have with us today Mr. Nitin Rakesh, CEO of Mphasis, and Mr. Manish Dugar, CFO. As a reminder, there is a webcast link in the call invite mail that the Mphasis management team would be referring to today. The same presentation is also available on the Mphasis website www.mphasis.com in the investor section under the Financials and Filings as well as on both the NSE and BSE websites. Request you to please have the presentation handy. As a reminder, all participant lines will be in a listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone.
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 on the Q2 results release that has been sent out to all of you earlier. I now hand over the floor to Mr. Nitin Rakesh to begin the proceedings of the call. Thank you, and over to you, Nitin Rakesh.
Thank you, Aman, and thanks everyone for joining us today. Apologies for a late start. We were waiting for confirmation on the upload of the deck to the exchanges. This is a unique and dynamic environment that presents both challenges and opportunities for all of us. Regardless of the circumstances, we continue to move forward from a position of strength. We have a foundation of strong industry solutions, marquee client base, and earnings and cash flow. All of this will help us continue to execute our growth strategy and insulate it from market challenges. Let me start by sharing some insights that we witness from a vendor's point. As per a recent tech spending survey by Bain, 2/3s of surveyed enterprises expect to increase IT spends in 2023.
Tech spends appear to be more resilient relative to the volatile macro conditions compared to their behavior in the past. Furthermore, changing deal constructs and managing flexibility in fixed costs favor tech spends. Top line priorities continue to be leveraging the cloud for digital transformation and leveraging data and analytics for decision-making and customer intimacy. Nearly 2/3s of the surveyed enterprises expect vendor consolidation to be a priority area. Which we believe is likely to play out with greater vigor in 2023 as enterprises contend with difficult macro conditions. Our Q2 FY 2023 revenue represents a 16.8% YoY growth in constant currency terms. Direct revenue grew 2% quarter-over-quarter and 19.2% year-over-year in constant currency. In second quarter FY 2023, we experienced a further impact from a key client.
Together with slightly greater than expected ramp- down in our mortgage BPO LOB, this impacted our sequential growth in second quarter FY 2023. Our direct business accounted for 94% of revenue in this quarter. DXC's contribution to our revenue is 44.6%. Given the low and declining contribution of DXC to our overall revenue, direct business strong growth reflects our overall growth. Regarding geographic growth, our anchor geography, Americas, has fared better with an overall growth of 20.4% in constant currency terms. Excluding DXC, the U.S. growth is marginally higher at 21.4% in constant currency terms. From a services perspective, our application service line has been a driver of our growth with 34% growth in direct apps in this quarter, thanks to the secular themes of digitalization and transformation.
We believe that continued strong growth in apps is a testament to our continued investments in the right service areas using our unique presence, core-led competency development model, as well as our ability to leverage the repeatability that comes with this highly efficient model. All our verticals saw double-digit year-over-year constant currency growth in this quarter. Our anchor vertical, banking and financial services, which saw impact from a decline in the mortgage LOB, nonetheless grew 15.3% in constant currency terms. Direct BFS grew 15.7% in constant currency terms on a YoY basis. We continue to enjoy market share gains with our key BFS customers. Direct GMP grew 33% year-over-year in constant currency terms. This is a focus vertical for us. Direct logistics and transportation business grew 16.5% in constant currency terms.
Our smaller verticals such as healthcare, clubbed in the other segment, continue to grow faster, registering 34% year-over-year growth with indirect. This robust growth of smaller verticals reflects the success of our new client acquisition strategy. I will speak more about it in a few moments. Contribution from fixed price as a percentage of revenue has risen by 410 basis points on a year-over-year basis. FY 2023 builds on our client mining improvement in FY 2022. We said before, we continue to consolidate our standing with our key clients, resulting in continuing market share gains. This is borne out by client metrics.
The middle of this chart of this slide shows that our top five and top 10 clients have grown consistently, registering 28% and 29% respectively growth in second quarter FY 2023 in constant currency base terms on a last 12-month basis. Our top three clients contributed $150 million plus each in last 12 months with our top client LTM revenue contribution exceeding $200 million. The average LTM contribution of our top five clients exceeds $150 million. All of our top six clients are greater than $75 million, which we continue to believe is quite unique for a company in our category. Our top six to 10 clients grew 30% constant currency on a last 12-month basis. Notably, our 11 to 20 clients grew 35% LTM constant currency, indicating the increasingly broad-based nature of our overall growth.
Our new client revenue continues to grow rapidly, growing at 53% constant currency terms on a year-on-year basis in second quarter 2023 over second quarter 2022. In particular, we have released the results of our new client acquisition engine. We have reinvigorated this program with dedicated leadership as we've called out before. We carved out five well-considered select verticals to focus on for NCAs, as we now call them Enterprise Five. Namely BFS, in which our positioning and track record is already solid. This vertical is large enough to continue to provide growth runway in the long- term. Second, insurance, logistics, TMT, and healthcare. Each of these five NCA verticals has its respective client acquisition strategies led by dedicated sales, delivery, domain, and technical leadership.
We have an elaborate operating model in place to transition clients to a strategic status with the client engagement structure and investments defined through the phases of the transition. As clients move through the transition phase and become strategic, we progressively bring the full force of our engagement model, dedicated client resources, and GTM motions in engaging with such accounts. Three of our five NCA verticals have become $100 million verticals on a run-rate basis within three years of setting up the NCA architecture. The fastest growth in smaller verticals is in healthcare and travel. NCA has almost doubled in revenue over a two-year period on an LTM basis and now constitutes almost a quarter of our direct revenue. This growth is reflected across our NCA verticals as shown here. What's behind our strong TCV track record is our evolving tribe and squad model.
This model, which has helped us scale our ability to service the growing pipeline and close many more deals, continues to mature. The portfolio squads within each tribe continue to ensure that we constantly evolve our solutions, adopting the newer tools and methodologies. To cater to our customers' need for speed, the tribes have evolved a composable approach to our offerings. This enables us to combine offerings from multiple tribes effectively to address the typical requirements of our customers. We have also identified over 40 solution archetypes that are typically needed, thus allowing us to build frameworks and accelerators that facilitate faster deployment. These archetypes are then contextualized to the needs of specific domain or even specific client by our deal squads. We also updated the definition and content of our tribes recently based on key trends and customer needs.
We've constituted a transformation program office with a team of seasoned large program management execs who help in crafting large transformation deal constructs, post-deal governance models, and to ensure lessons learned with each such program are templatized and carried forward in additional programs. Almost all of our pipeline is tribe-driven and is up 18% quarter-over-quarter despite record conversion from pipeline to new sold TCV in the last four quarters. We recorded TCV of $302 million of net new deals won in second quarter FY 2023. Our average TCV trending up over time and is now about $300 million-plus. 81% of the TCV is in new gen areas. Our deal wins in this quarter include two large deals of cumulative $110 million in TCV.
While we retain our market share with BFS clients, our large deals are increasing, increasingly coming from other smaller verticals as well outside of BFS. We continue to generate a high percentage of our TCV through proactive deal pursuits, where win rates are materially higher than in competitive RFP situations. As we report our TCV on a net new basis, excluding renewals, we find the correlation between our direct TCV and revenue growth to be reasonably high, exceeding 0.8. Coming to our client metrics, our track record in migrating clients from one revenue bucket to the next continues to be healthy. In this quarter, we sequentially added to our count of $5 million and $20 million revenue categories, while our larger $50+ million category relationships continue to deepen further as discussed. In this quarter, the LTM contribution of our top client crossed $200 million.
As mentioned, we won two large deals in the quarter, taking the total number of large deals in the last four quarters to 12, double of what it was in the prior period. Coming to our financial metrics, our margin philosophy affords us the flexibility to manage our profitability in a volatile environment. EBIT margin at 15.3% is fairly stable and within the stated band of 15.25%-17%. In keeping with this margin model, we were able to absorb the rising personnel costs by tightly managing the SG&A and other levers as we intended to. Operating profit grew 3.3% quarter-over-quarter and 24.5% year-over-year to INR 5,376 million in second quarter of FY 2023.
Our EPS for the quarter at 22.2 grew 4% quarter-over-quarter and 22% year-over-year. Our cash conversion measured as operating cash as a percentage of PAT stays at near 100%. Vectors of our growth strategy align around the core themes of tech capability expansion, vertical focus, and geography expansion. Under technology capability expansion, we are investing in accelerating our hyperscaler strategy and refining our GTM approach and increasing our repeatability of deal archetypes using the tribe and squad model, which we have discussed earlier. On vertical focus, we are focused on improving our end-to-end solutions in BFS and insurance while investing in developing our technology points of view in other verticals under the NCA program, as I just discussed before.
Our geo expansion strategy sees us making investments in the smaller geos such as Europe and Canada and expanding our core vertical strength in BFSI to clients in the geography. We have conceptualized and are well-positioned to execute against our playbook for growth in the current environment, depending on how the macro pans out. The key ingredients of our playbook include propositions for consolidated cost takeout, accelerating the transition from run to change, digital, and tuck-in M&A. The actions have also been customized within account action plans, keeping in line with our account-centric TMT motions. Some of our key clients may embark on major consolidation exercises in response to the macroeconomy. We are confident that we will be strong net gainers in such scenarios based on our positioning and track record with them and prior outcomes in such scenarios in the past.
To sum up, I'll leave you with a few points. One, direct growth at 19%+ in constant currency terms the second quarter, despite headwinds from mortgage LOB and earlier than expected furloughs. Two, our KPIs are moving in the right direction, namely our consistently improving track record in large deals. Our TTM TCV at $1.29 billion speaks to our rising run rate from a TCV standpoint. Improving client mining metrics across revenue buckets continues to strengthen our diversifying growth. As I previously stated, our average top five client last 12 month contribution has crossed $150 million. Our top six to 10 clients continue to grow well above our direct revenue growth with 30% LTM growth. While the 11 to 20 clients have also grown very strong. Our pipeline has grown 18% on a quarter-over-quarter basis.
Our talent strategy is on course. Our utilization reflects our efforts to infuse our talent supply chain with more freshers and optimize for pyramid. Our overall utilization in this quarter was impacted by furloughs. However, Q2 2023 exit utilization was 4 percentage points higher, suggesting an improving exit run rate on this parameter. Three, investing for growth by using operating leverage and operating in a stated target operating margin band, we believe that our margin stance ensures margin stability in a volatile environment. Our EBIT margin of 15.3% lies in the stated band, and our adjusted EBIT margin of 15.9% is stable sequentially and on a year-over-year basis.
To be sure, we are operating in an environment of increasing macro uncertainty, which potentially affects decision-making of clients, potentially requiring them to repurpose their spends, causing supply chain uncertainty, and all of which can alter the complexion of near-term growth while making sure that we are well positioned to gain through the uncertainty. Coming to our FY 2023 outlook, we continue to maintain our growth focus even in the uncertain macro environment. Our account-centric strategy to seed accounts up the value chain is working. All of our core areas are growing across a diversified industry client base. We are seeing some seasonal weakness in select clients, but a strong order book in the quarter and 18% increase in the pipeline would help us navigate this going forward.
We also feel confident of mitigating any headwinds in the mortgage business and actually see this LOB to be a growth driver as the macro turns stable. Given the consistency in outcomes from executing to our strategy, we are confident of maintaining our EBIT margins in the stated band. Given our actions on operations efficiency, we also intend to continue to invest in growth accounts to consolidate our position with key customers, and a stable margin outlook gives us that flexibility. With that, I'm gonna open up the line for questions and answers. Operator?
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 the touchtone 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. Thanks for the opportunity. The first is, Nitin, how do you see the demand environment sort of evolving? I'm sure the deals that you have closed this quarter would be the ones which you have been chasing for a while now. Incrementally, are you seeing any slowness in decision-making that worries you in terms of closures that could impact next year in some form? The second is, considering the furloughs that you have seen this quarter, how do you see furloughs going forward in Q3? Do you expect it to be higher than the previous years? That's the second. Finally, on the logistics vertical, if you could just give some color on how client spend is evolving, because there have been news reports of some logistics players in the U.S. suggesting a weakness. So just wanted your thoughts on all three. Thank you.
Sure. Thanks, Nitin. I think, let me take the first one, which is the demand environment. I think, uncertainty is obviously not good because it creates, you know, all sorts of chaos when it comes to budgets and, you know, in-account actions and so on. I think despite that, you know, $300 million+ in TCV in quarter is actually a fairly satisfying number. We are very happy with the fact that we were able to close two large deals, both meaningful. I think, there is definitely additional opportunity that is being thrown up as well through the environment. So that's the reason pipeline has actually gone up. All the actions that we talked about from a playbook perspective are also going to continue to lead, you know, us to a hard pipeline environment.
I think our focus really is now on making sure that we continue to find ways to close. While there has been some I would say uncertainty driven decision-making you know reactions, I think for the most part, given that we are playing more on the transformation and change side impacting large programs such as data center exits or data migrations, data engineering you know new platform build. I think those continue to get fairly you know stable funding. Of course, there are other parts of portfolios that are paying the price for it because clients are reluctantly prioritizing which programs to keep going and which programs to deprioritize.
I think from that perspective, being on the right side of that portfolio has definitely helped us and will continue to help us in winning deals. I think as the macro pans out and we get a better idea of the 2023 budgets, you know, in Q4, we probably have a better sense of real impact. But at least at this point, given our TCV velocity, given our pipeline, which is definitely to me is the lead indicator for what happens next, I think we feel pretty good about where we sit from a deal closure, you know, deal origination standpoint. I think not only are we closing, we're also originating, which is kind of extremely important. I think your second question was around furlough.
I think it's really, if you ask me, a very client-specific issue that happened. This definitely is a seasonally weak quarter, not only because of the furlough issue, but also because of just the holiday season and the number of working days issue. I think that's an industry phenomenon that you're well aware of. At this point, I think it is hard to say whether the impact will be higher or lower. I think at this point, visibility-wise, you know, we are not, you know, we're not seeing that level of uncertainty that it's gonna drive it materially higher compared to prior years. At the same time, I think, you know, we have work to do over the next eight to 10 weeks.
At the same time, you know, Q2 was not supposed to be a furlough quarter, but it was. I think there are percentages that will come through. On the third point around logistics and transportation, I think I will guide you back to the comment I made on my first answer, which is that if you're on the right side of the portfolio, if you're in programs that are strategic, if you're in programs that are getting funded, you know, no matter what the in-account action is, you will. You know, we will find and we have found ways to continue to expand our wallet share. You know, while there may be short-term fluctuations in client actions, I think pipeline action, deal closure, and ability to win wallet share is actually gonna, you know, is helping us drive through that uncertainty as we speak.
Sir, thank you, Nitin, and all the best. I'll fall back in the queue .
Thank you. The next question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.
Yeah, thank you. Let me just take quick ones from my side. First, you know, given the diminishing, you know-
Can you please raise the handset? It's not very clear.
Is this better now?
There's a lot of crackling, but go ahead, Mukul.
There's a lot of crackling.
Is this better now?
Yes, much better.
Yeah. Nitin, basically, given the diminishing contribution of mortgage business, you know, to your overall revenues, it would be helpful if you can just give us some sense of how the, you know, ex mortgage core business grew during this quarter. Even qualitatively, that would at least give us some sense of, you know, how to look at the direct business. Second, you know, on your top client, the growth was quite good. You know, we have been continuously hearing from them about increasing concern, you know, from their business, literally almost every month. How do you see that? You know, is that something which can, you know, kind of act as a risk to our growth?
Mukul, I think the first question, the answer is that, the core business, and I mean, there are some data points in the print that you can see. You know, the Americas applications, both of those metrics are a good indicator of how the core business growth has been. I think, 34% application YoY growth and applications now the highest it's ever been at 67%-68%. I think those are two metrics that will give you a sense that outside of the mortgage LOB, the business has actually been fairly robust, both in terms of, other metrics that I point to is the top five, top 10. By the way, that kind of growth is after the impact of mortgage as well.
The next 10, NCA, I think the core business continues to be in great shape. We are very confident that we'll continue to actually gain share through the uncertainty. The second aspect of you know the issue around mortgage itself is that you know it is a very key part of the U.S. banking industry. We took a very forward-leaning stance in the last cyclical downturn when that happened in 2018-2019 when the interest rate tightening cycle was on. We added new service lines besides origination and refinance.
You know, that diversification has really helped us to some extent, but the pace of change has been so rapid in the last, you know, quarters that, you know, the diversification can only work to a point because, you know, you're sitting at record rates for 40 years right now. I think that definitely has had an unprecedented impact, you know, greater than imagined. From that perspective, we also think there's an opportunity for us to further consolidate our position in that segment. There are some active conversations with very large customers, existing and potential, which basically give us the ability to really become very, very strong and adding additional service lines that we don't do today.
I think from that perspective, we are still taking a view that we have to be present in a very key segment of the U.S. banking industry, and we will continue to find ways to find growth in that segment. The moment macro turns stable. I think the overall, you know, to summarize, the overall core business is strong. Client segments, verticals, core geo, you know, new client, you know, the strategy which we detailed out in the last few minutes. That gives. Of course, not to forget the TCV and the pipeline commentary.
Around the top client discussion, I think, you know, rather than get into a specific discussion around the top client and the weather forecast from their business guys, I think the best thing really is to stay focused on where the spend is going, where there's opportunity, and how do we expand the target addressable market in account, which is exactly what we've done in the last six months. We've added a few things. One, we've added new service lines. For example, the Blink acquisition gave us a whole new market segment within all our top accounts, including the one you're referring to. We were able to actually go in and open new deals that we never did before. Second, we continue to actually gain from wallet share. Very, very strong gainers in wallet share.
Thirdly, our capability-led model, especially around cloud and data, is actually opening up a whole new set of spends, that even if there's repurposing of other spends, this is not gonna get cut. I think positioning the portfolio in the right areas of spend and having the right differentiated capability is what's driving that growth.
Great. Really helpful. Thank you.
Thank you. The next question is from the line of Mohit Jain from Anand Rathi. Please go ahead.
Yes, sir. I have three questions. One is that TCV sort of suggests higher growth for us, but last two quarters have been relatively low.
Mohit, can you pick up the handset, please? The speaker is creating some noise, I think, for everyone.
Can you hear me? Can you hear me now, sir?
Yeah.
Compared to the TCV wins that we had, the growth reported in the direct business for last two quarters is relatively slow. Should we expect, while numbers suggest there should be a pickup in the next two, three quarters? Is that. The correlation also reflects that. Is that a fair assumption or you think despite TCVs in the pocket we may still see slower growth over the next six, nine months? That was one. Second related is on TMT declines. Like what happened in that particular segment quarter-on-quarter, how is the deal flow and what kind of outlook do we have there? Last one is related to utilization and margin. Now we are at 68% headcount. Addition has also sort of declined as far as IT services are concerned. How should we read that improvement of 400 basis points and the impact on margins?
Hi, Mohit, this is Manish here. Taking your first question, as Nitin was mentioning, there is an impact of furlough and there is an impact of mortgage business which is, you know, contributing to TCV not translating into revenues as much as it should have. Even though if you look at it, the correlation coefficient of TCV conversion to revenue has remained steady. From a going forward basis, TCV and pipeline growth gives us confidence that, you know, our conversation with the customers and our ability to convert deals continues to be good including large deals, having won two large deals adding up to $110 million in the quarter. So far as TMT is concerned, you know, the furlough impact would have impacted the TMT numbers.
You know, I don't think it is any indication of a directional movement. It is a specific impact in the quarter. Q3 being a seasonally weak quarter anyways, I think it should probably. We should be able to tide over that as we get to Q4. Utilization, as you rightly said, the exit utilization has improved by 4 percentage points. Given that, the IT and apps headcount gradually grew over the quarter, on an average basis, it has not improved so significantly. Furlough would have impacted it any which way. You know, reported basis, the average utilization looks almost flat.
To your question on gross margin, utilization improvement, offshore increase and our ability to make sure that we continue getting price increases partially got compensated by you know, furlough and some of the investments we made in accounts that we are focused on trying to gain share as well as to grow the volume trends. On an overall basis, the gross margin this quarter continues to be in line with what the gross margin for the same quarter last year was. Keeping to our philosophy of investing for growth and having levers to manage profitability within that narrow range, we were able to use those levers and offset the downfall in the gross margin percentages with the adjustment that we did in the sales and marketing and G&A.
As we have maintained, we continue to be confident on maintaining the margin in that range of 15.3%-17%. If we are able to get tailwinds, as we go forward on margin, we would like to continue investing, especially given in this environment where customers are looking at partners who can help and who can, kind of, you know, accelerate their requirements of cost takeout and consolidation.
Just one more point to that. I think, from a pipeline perspective, TMT is actually fairly strong even today.
Yeah.
I think this was a very specific client we've been on that disruption.
Okay. Under headcount, sir, there was this headcount reduction quarter-over-quarter in tech services offshore.
Yeah. Again, I think there's slightly mixed, you know, impact of furlough plus in-account actions. At the same time, you know, the deal wins that we talked about will actually start ramping up offshore as well. From an overall standpoint, I think the story of offshore-led growth will continue to happen. As you know, when we have large lumpy deals that ramp- up, they ramp- up the on-site portions first, right? That's kind of a little bit of what you saw towards the end of this quarter, you know, in the IT business.
Just to add, Mohit, billable headcount has actually grown by 700 people. What has reduced is the overall headcount.
Sir, I'm looking at offshore billable technology services. This is on page 11.
Yeah, I understand. I think the way to think about it is the overall headcount, because, you know, we would like to make sure that beyond a point, we also look at profitability and utilization. I think we are sitting on a pretty comfortable levels of utilization. You know, if we don't have a challenge in meeting our demand, we would not like to, you know, continue, you know, increasing that, bench. I don't think overall headcount should be seen, especially given the lower levels of utilization we are at.
Coming back to the previous point, there should be margin tailwind because you have given a band, and most of the time we are at the lower end of the band.
Yes, there should be margin tailwind as long as we make sure that we don't, you know. The decision-making process is really around do we need to invest with a customer in a deal in a particular capability. So I think as utilization improves, as some of the tailwinds from supply.
Offshoring tailwind.
Tailwinds from supply chain. Yes, offshoring tailwinds. We definitely see a bias on the upper side with the margin. Again, we will make a decision depending on what the business needs, because I think at this point in time, having a forward-leaning stance in helping finding growth with customers is gonna take priority.
Great, sir. Thank you, and all the best.
Thank you.
Thank you. We have the next question from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Hello.
Yes.
Yeah. Can you hear me?
Please use the handset.
Yes. Yes, go ahead.
Yeah. Yeah. Thanks for the opportunity. Just in terms of the client in which we witnessed the furlough in this quarter, is it that client is back in terms of normal operations, or there could be some further impact in this quarter as well?
Again, as I mentioned, it's too early to talk about client-specific impacts in Q3. Again, keep in mind this is a client that has a pattern of year-end closures, and I think that impact might continue this quarter as well. We will obviously try to mitigate as much as we can in terms of what we think is doable.
Okay. Nitin, can you throw some light in terms of how the mortgage business one should look like, going forward basis? Is it now bottomed out or there could be further headwinds as the whole entering into second half?
Yeah. Unfortunately, I think it's very hard for me to give you a forecast because all said and done, as I mentioned, it is a key part of our portfolio. It's a key part of the U.S. banking industry. There are parts of the business that actually have grown in the last three quarters, because that was the whole countercyclical investment we made towards, you know, other lines such as home equity, diligence and servicing. There are still parts of that business that we haven't yet invested in. As I mentioned, right now our stance is to consolidate our position because we are one of the leading providers. We've obviously also integrated tech with it.
There are customers where we might actually end up, you know, taking a big role in rolling out a whole new service line for them, build the platform, then run the operation, use offshore as a leverage to lower the cost and so on. I think there is a lot happening in that vertical. It's very hard for me to give you a specific answer on when it will bottom or what the outlook will be. I think we just have to deal with that uncertainty for a little while longer until we see some stability. I am 100% convinced that there is a lot of growth to be had in that business, you know, in the medium to long- term.
Okay. Helpful. Just last bookkeeping question. What is the difference between adjusted EBITDA margin of 15.9% versus reported 15.3%?
EBIT, not EBITDA. Manish?
Yeah. Sorry, EBIT.
The primary adjustment that we are sharing with you is, if you remember when we did the Blink acquisition, we had talked about the fact that there are charges that will continue for a period and then stop. These are mostly intangible amortization. The adjustment is only for that. You know, as the quarters progress, it continues to decline both in absolute terms and in percentage terms.
Okay. Thanks and all the best.
Thank you. The next question is from the line of Dipesh Mehta from Emkay Global. Please go ahead.
Thanks for the opportunity. A couple of questions. First of all, just want to understand the correlation decline now from deal win to revenue conversion. Earlier correlation used to be 93-94%. Now it came down to 85%. Then growth rate also moderate while deal intake remain more or less about $300 million. So can you help us understand how it plays out? Second thing is about the deal pipeline QoQ growth. If I look for last two quarters, growth remain healthy, but deal intake is not showing that kind of sustained trend. So if you can provide some sense whether we are seeing elongated sales cycle, or if you can provide some color on it, what is playing out there.
Third thing is about the revenue growth. For last couple of quarters, we are growing lower than some of your peers, which eventually will translate it into obviously YoY growth. Currently, we are doing well on YoY because of a healthy trajectory in FY 2022. How do you expect the trajectory on YoY to evolve over next two quarters? You think QoQ-wise we will see acceleration playing out in H2 or it is more in FY 2024? Thank you.
Dipesh, hi, this is Manish here. I'll take the first question and probably, Nitin will take the subsequent one. While you are right that the correlation coefficient is looking like 0.9 to 0.8, the primary reason for that is the impact that we saw because of, on one side, the mortgage business slowing down, on the other hand, the furlough. Both of which impact the run rate revenue, which, as you know that, you know, are cyclical and hopefully will correct as the interest rate corrects. But for that, the correlation coefficient of TCV conversion to revenue continues to be in that 0.9%.
I think on the second point around deal cycles, I think the fact that we did close $300 million+ in TCV despite a segment of our business actually not seeing any large TCVs on the mortgage side should tell you that I think in the core side of the business there is ability to convert and close deals and move forward with customers. I think there is some degree of uncertainty for sure in client execs, especially as they get, you know, they're busy finalizing their FY 2023 budgets. Which is why we had to kind of lean in on some of the survey results to see what stance we should take, what services we should strengthen.
That all of that, you know, went into the decision behind creating the playbook that I shared with you earlier today. On the third question of yours on the sequential versus our YoY growth, I think you're absolutely right. We obviously have paid the price for the cyclicality playing out. I think the focus really is on making sure that through the remainder of the year we are able to continue to take a forward-leaning growth stance, and convert as much of this TCV into revenue and as much of the pipeline into TCV. I think if pipeline and TCV continue to operate, I think the sequential growth and the YoY growth will both come to where we need it to be.
Just to add to that, Dipesh, on your last point, rate hardening has been at such a fast pace that the counter cyclicality has not played on, as much as you would have expected, causing a surprise on the impact of mortgage business, because of the interest rates. Add to it the surprise that we got of furlough in quarter two, which was again, typically not a trend. This would normally be in the quarter three.
Understood. Thanks.
Thank you. Our next question is from the line of Venkat Samala from DSP Investment Managers. Please go ahead. Venkat, your line is unmuted.
Hello. My question has been responded to. Thanks.
Thank you. Our next question is from the line of Divyesh. As a text question on the webcast. What is the reason for decline in non-billable workforce?
you know, utilization was probably at a level where there was opportunity to improve. As we had you know, more people deployed to billable projects, we did not necessarily need to recruit people to fulfill that requirement. We could use the people who were in the bench to do the fulfillment, and that led to a reduction in non-billable people.
By design.
Yeah.
Thank you. The next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.
Yeah. Hi. Thanks for the opportunity. One question in terms of like our on-site headcount seems to have gone up by almost 9% while our on-site revenues are down. What explains that? Is it the transition for the new deals that you signed in? Has that had an impact in terms of your margins as well?
Yeah, Ashwin. Manish here. As you know, most of the mortgage revenues are on-site and you know, a large part of the furlough impact was also on-site. You're right that while the headcount increases happen on-site, it is not showing up in terms of revenues because of these two large primary factors.
No, Manish, I was talking about the tech services headcount. Tech services headcount is up 9% for you sequentially. The BPO headcount is actually down on-site. What explains the substantial increase in on-site headcount? Our utilization seems to have dropped on-site, and our on-site revenues also seem to have dropped.
The headcount increase, Ashwin, is a period-end point-in-time data, while the utilization is an average through the quarter. You are right that headcount, as we look at as on the September 30th, looks like an increase, but the billability came in only towards the last month of the quarter, which is why we actually shared the fact that our utilization is actually 4% better when we look at it at the end of the quarter versus when you look at it through the quarter. The furlough would have impacted the on-site revenues in tech services. The headcount increase did not translate to billable headcount during the quarter because addition happened mostly during the quarter.
That is in the run rate for Q3 now.
Yes. It should come in as a revenue in the Q3 run rate.
Okay. Understood. Thanks. Just one more question in terms of insurance. That's been a segment that's been kind of sluggish for us for a while. What's the outlook in terms of insurance and any signs of pickup there?
I think that's a good question. If you look at the NCA chart that I shared, I think ideally what we wanna do is to create a few anchor clients in each of the segments of insurance, life, P&C and brokerage. I think we are at a point where we've made a lot of investment in the last two to three years in strengthening and broadening that client base in insurance. There's still work to be done. I think again, it's a prioritization of investment dollars, sales dollars, account coverage, both in the U.S. and in Europe, especially U.K. I think we do see that there is runway for us to continue to grow that business line. At this point, I think at least the NCA side of the house has grown well.
We do see potential to add new large marquee names. It's a motion that is driven primarily by addition of new logos because we do need to expand our client base. We've done some of that in the last two years. We've added some marquee logos in those three segments, but there's more work to be done there.
Okay. Thanks, Nitin. All the best.
Thank you.
Thanks.
Thank you. The next question is from the line of Vibhor Singhal from Phillip Capital. Please go ahead.
Yeah. Hi. Good morning, everyone. Thanks for taking my question. A couple of questions from my side. I'm sorry if I missed that number in between. I got dropped off. Can you just provide us with a broad range as to how much of percentage of our revenue today would be the mortgage-related business and how much of that would be interest rate sensitive? I know you mentioned it's hard to give an outlook, but as a percentage of our revenue, how much, how big could it be?
It's, you know, we started clubbing it in the direct business two years ago, and I don't think we want to break it out separately at this point.
All right.
I think all I'll tell you is the interest rate sensitive piece of the business is kind of low single-digit percentage of revenue, but that's kind of where we will stop with the disclosure.
Got it. Also, Nitin, I just wanted to basically dig a little bit deeper into the margin trajectory. I think last year, when I think, the entire sector had tailwinds from lower travel costs and facility expenses and all, we had mentioned that we are utilizing that to reinvest into the business to secure growth. I mean, I think FY 2022 also I think we did lag far in terms of growth with some of the similar size peers. This year, of course, as I think a couple of participants earlier mentioned, our Q-on-Q growth has been steady. Of course, it's been impacted by couple of factors and all.
Year- to- date I think we haven't achieved anything on the growth front, which is remarkably different from some of our other similar sized peers. Despite the fact that we let go of the margin expansion opportunity that we had in FY 2022. How do you see that playing out ahead? I mean, is the margins gonna remain in the same margin band that we are operating in right now at around 3.5% ± some range, and probably the similar kind of growth? I'm not talking about the near term. I know volatile times ahead. From a longer term perspective, do we have a target to maybe take margins north of 16% with a similar growth kind of target? I think, or do you think this is the comfort band that we're kind of operating in right now?
Hi, Vibhor. This is Manish here. A few things. First of all, you know, unlike what you said, last year was actually an industry leading growth for Mphasis, 34% organic and 36% increase in organic in the direct side of the business. We have stated that our philosophy will be to invest in growth by maintaining margins in a narrow band, and we have consistently followed and executed on it. There has been an increase and a decrease in margin in the peer group, but you know, we have remained nearly flat. In many cases actually there has been a decline from pre-pandemic margin levels versus where the peer group is today. While we have not seen that happen.
You know, even now there are significant opportunities for investment and, you know, some of those investments are impacting the reported numbers and some of those are, you know, baked into our reported numbers. The ones which are impacting the reported numbers, we have called it out earlier, the charges for M&A and the stock compensation that, you know, we have given to our leadership team. Having said all of that, I think we continue to have significant tailwinds to margins. We have talked about utilization. We have talked about price increase continuing to come in. We have talked about the continuing reduction in stock compensation and M&A charges.
We keep making sure that if there are opportunities to invest where the returns are more than what we would do with the cash generated in our balance sheet, we continue making that investment. What you see today is a confluence of quite a few things coming together leading to the softness in revenue. I don't think it should be seen as an indication of a directional change. Like Nitin mentioned, everything that relates to our strategy to growth, whether it is account centric growth, whether it is absolute centric growth, whether it is top five, top 10, top 20, whether it is vertical expansion, whether it is, you know, ensure that competency-led and mutual proactive deals. I think we are seeing, you know, significant positivity in all of those metrics as it relates to our core business.
We feel confident that our strategy of continuing to invest in growth while maintaining margins in a stable range is the right strategy to adopt. Having said all of that, we have also said before that, you know, we believe there should be a northward bias to the margin. It's a question of when and not if. The reason why it's a question of when is because there is an uncertainty in the macro, both in terms of, you know, what we see happening from a geopolitical perspective, as well as what we see happening from a supply perspective. As some of those things become clearer, we will have a better view of when that margin expansion will start becoming visible. Otherwise, the strategy continues to be investing for growth while maintaining margin in a narrow range.
Got it. Thanks a lot for answering that question in great detail. Really glad to hear that we maintain that northward bias in the margins. Difficult times are behind us now at this point of time. Thanks for explaining that in detail. Thank you so much for taking my questions and wish you all the best.
Thanks, Vibhor. Welcome.
Thank you. Our next question is from the line of Sameer Dosani from ICICI Prudential AMC. Please go ahead.
Thanks for the opportunity. Just to understand, this headcount addition in on-site. Is it fair to assume that, you know, that going forward, onshore revenue would increase and that could have a margin impact? Also just to understand the new deals, right? When would be the ramp-up starting for the newer deals that we have won? Because these are fairly large deals and will take time. Whether initial period would be an on-site role, because that would then again also have a bearing on the margins. Thanks.
Sameer, first of all, the headcount addition on the IT services, IT and apps business happened towards the end of the quarter, which is why it did not reflect in revenue in the quarter. And like Nitin mentioned, it should come in in the run rate revenue in quarter two, quarter three. From a profitability perspective, as we had talked about in our previous calls, the deal margins are not, you know, measured based on offshore, on-site, etc. I mean, typically we try and make sure that the delivery assurance and the quality of delivery is, you know, primary and then we decide how much should be on-site and offshore.
Given most of what we do are proactive and value delivery rather than cost takeout, and when I say cost takeout, it's not an input cost conversation. Clients are more than happy to make sure that irrespective of the mix of on-site, offshore, we are able to get the margins that we desire, right? Even if it is on-site-centric revenue which comes in because of on-site addition, we don't think that has any impact on the margin, so to speak, as we go forward. You know, the revenue for that headcount addition should start showing up in quarter three.
Also they'll be pulled through revenue offshore because these are deals that will effectively have a pretty healthy element of offshore as well. That offshore tailwind will help mitigate any margin impact that we worried about from an onshore expansion perspective.
Okay. Also the new deals, right? These ramp-ups, when do we expect ramp-ups to start on these deals because these are fairly large?
Sameer, the deals are not any different in terms of tenure. You know, these are typically the same three to 3.5, four years kind of life of deal. If you consider a ramp-up period of 1.5 to two months, we should start seeing the run rate revenue starting to flow in 2.5 to three months. Depending on when the deal got closed, like, you know, when we did the last earnings announcement, we had talked about the fact that, you know, we had already won a $60 million deal. Technically that revenue should have already started coming in as we speak in October on a run rate basis. Some what we won in August would come in a little later and September maybe a little more later.
Thanks. Last question, if I may. So if I look at, you know, this is an industry phenomenon, right? Funnel or the pipeline is expanding on a Q- on- Q basis for all the companies, but the deal wins have remained more or less flat. Do you think this is an indicator that the competition is increasing in the industry and, how should we look at that? Thanks.
Yeah. I think, again, comparability-wise, each company declares a different construct of TCV. You have to look at their own trend and apples-to-apples comparison of how their trajectory has been. We don't issue renewals and it's, I think for us, we are focused on constantly, you know, making sure that we have enough deals in the pipeline for us to get a sustainable, you know, level of growth, especially as we described in the core business, in the last few quarters. We've taken up that number quite consistently. You know, it used to be sub 100 a few years ago, then it was 200 plus, 250 range, and now it's 300 plus quite consistently. I think our effort will be to make sure that we are consistently taking that number higher.
This industry has always been, I mean, hyper-competitive because it's not, you know, unlike many other industries, there is no, you know, large-scale consolidation. See, that's the reason why we have to focus on finding our own specializations, differentiations and positioning in each market that we operate in. I don't think, you know, I would read more than that into the TCV metrics.
It's okay. Thanks. Thanks for your question.
Thank you. We take the last question from the line of Nitin Padmanabhan from Investec. Please go ahead.
Yeah. Thanks for the opportunity. I just wanted your thoughts on if you could give some context on what driven the drop in S&M expenses and how we should think about that. Same thing on the gross profit line as well. If you could give some context on both.
Sure. You know, furlough and, you know, the investments that we make in, making sure that, we are proactively working with the client for large proposals and consolidation initiatives, those are primarily gross margin and COGS-related costs, and they impact the gross margin. From a gross margin to gross profit, I think that's primarily a numerator and a denominator change because of currency movement. As you know, the currency moved significantly. While the gross margin moved by one point, the gross profit moved by 3%, primarily because the translation led to a movement in the percentage higher than what the gross margin percentage movement happened.
To your question on S&M and G&A, we have talked about the fact that there is a investment that we make, which are short-term and which are long-term in nature, and we have an ability to flex them up and down. You know, we did take some of those costs, measures which we could avoid, spending on. Also remember that, same quarter last year, you know, the percentages were almost similar to what it is now. You know, 26.5% versus 27%. You know, S&M and G&A were also in the 0.1%-0.2% variance versus the same quarter last year. I don't think any of that action is a fact that we would have liked to avoid. It is just that, we prioritized investing, which had an impact on gross margin, and deprioritized the investment which was going into S&M and G&A.
Perfect. That's helpful. Thanks, Aman, and all the very best.
Thanks, Nitin.
Thank you. So we have one more question in the queue. That will be our last question for today. It's from the line of Abhinav Ganeshan from SBI Pension Funds. Please go ahead.
Yeah, thank you to the management for taking my question. I just had a couple of questions. First one is that, if you can just help me, how are we going to do things differently, you know, in Q3 and Q4 so that we can get our double-digit run rate of growth? The second point is what would be a comfortable level of utilization that we are looking at, you know, going forward? These are the two questions that I wanted to know. Thank you.
Sure, Abhinav. I think, I mean, I'm a little confused because we are already at slightly double-digit, you know, levels of growth. You know, in direct business it's close to 20% growth. I think again, our business is fairly straightforward in terms of how we think about the health of the business and the future prospects. Lead indicator is pipeline. Second indicator is TCV conversion. Then everything follows from there, right? Pipeline to TCV to revenue to margin. Of course, there are lots of other moving parts in the process that we need to manage on a pretty dynamic basis, but that's really the way we think about the business.
I think we've very transparently given you a fairly significant breakdown of the growth dynamics, especially driven by what we saw in Q2 and what we think is likely to happen in Q3. Given just the strength of the core business, the in-account model, client category growth, new client growth, application-centric growth, multiple verticals, you know, starting to come together, I think the core business continues to be in great shape. If we just keep executing on that model of TCV, pipeline to TCV, TCV to revenue, I don't think we need to worry about, you know, the double-digit growth metric that he talked about. Second, I think on the utilization front, again, you know, we are operating in a.
When we had a little more visibility, we brought the utilization down because we wanted to make sure that we had enough flex to find room to grow and to build our pyramid. We'll be a little bit more nimble and probably make a little bit more dynamic decisions. We do expect utilization to continue to trend up. I think it probably will get into the historical ranges that we were, probably have another 3-4 percentage points to go up over the next couple of quarters.
I think that was really useful. Thank you so much. One last question, if I may. Can you just throw some more color on this $200 million client that you've added, you know, which segment it is from, if you could just enumerate? Thank you, sir. Nitin, I'm sorry.
No problem. Thank you so much for asking. We can't name a customer, but it is a long-standing relationship of over 20 years, and it has constantly grown with us, and it is a banking customer.
Okay. That was really useful. Thank you.
Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Nitin Rakesh for closing comments. Thank you, and over to you.
Thank you, Aman. I think we are living through some interesting times. Overall, I'm pleased with how we are navigating through this. We continue to focus intensely on executing our strategy and while supporting our clients in this complex environment. We will continue to actively invest capital into our business to meet our customer needs and drive organic as well as inorganic growth. Thank you all for your continued interest in Mphasis and your sustained investment and time. Thank you. Wish you guys all a very happy Diwali.
Thank you.
Thank you very much. Ladies and gentlemen, on behalf of Mphasis Limited, that concludes this conference. If you have any further questions, please reach out to Mphasis Investor Relations at investor.relations@mphasis.com. Thank you for joining us, and you may now disconnect your lines.