Good morning ladies and gentlemen, and thank you for joining Mphasis Q1 FY 2023 Earnings Conference Call. I'm Steven, 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 Mphasis management team would be referring to today.
The same presentation is also available on the Mphasis website at www.mphasis.com in the investor section under Financial and Filings, as well as on both the BSE and NSE website. Request you to please have the presentation handy. As a reminder, all participant lines will be in 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 Q1 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, sir.
Thank you, Steven. Good morning, everyone. Thank you for joining our earnings call early this morning. While all of us are concerned about the post-pandemic impact, geopolitical tension, high inflation and interest rates, supply chain disruptions and its effect on global energy and food prices, we are still in a period of growth shaped by technology. In fact, technology is being seen as the biggest counter-inflationary tool and is reshaping the economic growth.
As enterprises are trying to make their supply chains more resilient and future-proof their businesses, they will require a more holistic and proactive tech strategy. A combination of macro trends and drastic reduction in the cost of computing, AI tools being widely available through cloud platforms and open source software. More and more clients appreciate the extraordinary impact of cloud-based computing, hyper-personalized customer experiences, and heightened cyber security mitigation models on their businesses.
This will accelerate gains for cloud providers and their partners, and will basically allow for wide use of modern technologies such as AI and data which are bundled onto these platforms. At Mphasis, we continue to invest for growth across markets, tech teams and domains. A May 2022 Bain survey indicated that over 90% of US companies expect to increase IT spend, and this is consistent with what we are seeing and hearing.
While there is talk of relentless prioritization and pressure to reduce run spend, this creates opportunity to explore proactive cost-value propositions like zero-cost transformation and higher outsourcing to offshore or nearshore driven by cost advantage, the need for faster time to market, and globalization of talent models. At this point, Manish will give us an overview through the performance during this period.
Q1 FY 2023 revenue presented 22.1% YOY growth in constant currency terms. Direct revenue grew 2.4% sequentially and 28.3% year-over-year in constant currency terms. Within direct, our anchor geography, the U.S., had robust growth of 32% year-over-year in the Q1 of FY 23 over FY 22 in constant currency terms. Direct business accounted for 94% of revenue this quarter.
DXC contribution to revenue is now 4.1%, g iven the low and declining contribution of DXC to overall revenue, direct strong growth more accurately represents our overall growth trajectory. With regard to geographic growth, our anchor geography, U.S., has fared well with an overall growth of 30% in constant currency terms. Excluding DXC, the growth numbers are higher at 32%.
From a services perspective, application service line has been a driver for growth with a 41% growth in direct apps this quarter, thanks to the secular themes of digitalization and transformation. We believe that continued strong offshore-led apps growth is a testament to our continued investments in the right service areas using our unique Horizon Scores led competency development model, as well as our ability to leverage the repeatability that comes with this highly efficient model.
All our verticals saw strong double-digit YOY growth this quarter. We are pleased with the continued growth in our anchor vertical, banking and financial services, which grew 27% in constant currency terms despite headwinds in the mortgage LOB. Q1 23 marks the eighth straight quarter of 26% YOY revenue growth in BFS. We continue to enjoy market share gains with our key BFS customers.
EMP, a focused vertical for us, continues to deliver dividends with direct EMP growing at 55% YOY in constant currency. The EMP segment more than doubled in FY 22 with 100% growth in constant currency terms, following on from 64% in FY 21. Similarly, we are seeing strong growth in healthcare bundled within the other segment for us due to large deal wins in the recent quarters.
This bodes well for an additional growth driver, especially with the current macro environment. The contribution of fixed-price engagements continue to rise. Contribution from FP&A as a percentage of revenue has risen by 490 basis points year-over-year in the direct business. FY 22 also builds on our client mining improvement in FY 21. As we said before, it consolidated our position with our key clients, resulting in continuing market share gains.
This is borne out by our client metrics. The middle chart of this slide shows that our top 5 and top 10 clients have grown consistently, registering 39% and 32% growth respectively in the Q1 on LTM basis. Client 6 to 10 grew at 39%, sustaining a consistent trajectory of much higher than average growth. Also notable that our top 11 to 20 clients grew at 24%, indicating the increasingly overall broad-based nature of our growth.
In particular, we are also pleased with the results of our new client acquisition engine growing at 68% year-over-year in the Q1 . As mentioned before, we re-migrated this program with dedicated leadership and carved out 5 well-considered tech verticals to focus on for NCAs, and as we now call them, our enterprise verticals.
While on a YOY basis, we still seeing good growth in Europe, there is a higher impact of the current environment in that region, especially in conversions from POC to revenue timelines getting stretched. We continue to have deal wins and a robust pipeline and we'll be committed to growth in the regions. In short, our strong client performance across the board supports our robust growth in the direct business.
Several capabilities in our tech factor support a consistent and robust performance in direct, such as our personalized customer engagement model, where customers can drive our GTM and resource allocation, allowing for a high degree of account-specific innovations. Ability to build ever-growing pipeline on the back of our effective price and squads model. The ability and capacity to source large integrated deals using our transformation model and deal archetypes, and I'll touch upon that briefly later on.
Finally, the scaling up of our digital competencies of our talent through the Dynamics platform and ongoing supply chain transformation, which I'll also touch upon this shortly. To record a TCV of $302 million of net new deals, won in the Q1 . In addition, we also signed another $60 million million dollar third transformation deal with a top client in the month of July.
Our average TCV metric is trending upward over time, and 80% of the TCV is in new JNEs. Our deal wins in this quarter include one large deal of $50 million plus TCV. Despite strong TCV record over the past few quarters, our pipeline is still up 6% quarter-over-quarter and 10% on annual basis, suggesting that our pipeline generation engine is firing in the current environment.
We continue to generate a high percentage of our TCV through proactive deal pursuits, where win rates continue to be materially higher than in RFP situations. As we report our TCV on a net new basis, excluding renewals, we find the correlation between direct TCV and revenue growth continues to be high at 0.87. What is behind our strong TCV track record is the evolving tribes and squads model.
This model is designed to scale our ability to service a growing pipeline and to close more deals continues to mature. The portfolio squads within each tribe ensure that we have constantly evolve our solutions, adopting the newer tools and methodologies. To cater to our customers' needs for speed, the tribes have evolved into a composable approach to our offerings. This enables us to combine offerings from multiple tribes effectively to address the technical requirements of our customers.
We've also identified multiple solution deal archetypes that are particularly needed, allowing us to build frameworks and accelerators that facilitate faster deployment. These archetypes are then contextualized to the needs of a specific domain or even a specific customer by our deal squads. Each archetype defines all the necessary artifacts required for the sales cycle, from deal identification, proposal preparation, solutions and commercial constructs, delivery frameworks, accelerators and IT assets for faster and smoother execution.
We have also updated the definition and content of our tribes recently to meet some key trends and customer needs. In addition, we 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 also to ensure lessons learned with each such program are emphasized and carried forward in additional programs.
Almost all of our pipeline is tribe-driven and is up 6% sequentially despite record conversion from pipeline to new source TCV in the last 4 quarters. Let's now turn to our client metric. 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, $10 million, $30 million, and $150 million revenue category, while our larger $50 million plus client relationships continue to deepen further.
We have added one client to the greater than $150 million category on an LTM basis, taking the total to 3, with average contribution from top five clients being $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.
Let's look at our financial metrics. Our margin philosophy affords us the flexibility to manage our profitability in an environment of rising talent costs in a heated market. Gross margin grew 20 basis points sequentially and 160 basis points YOY to 28.2% in Q1 FY 2023. EBIT margin of 15.3% is within the stated 15.2%-17% band.
Adjusted for our M&A charges, operating profit grew 3.6% sequentially and 26.6% annually to INR 5,406 million. Adjusted operating margin was broadly stable both QOQ and YOY at 15.8%. Our adjusted EPS for the quarter grew to INR 22.4, grew 1.5% sequentially and 33.2% YOY. To sum it up, I will leave you with 3 points.
Digital growth at 28% in constant currency is well above industry average and builds on the industry-leading growth we achieved in the prior 2 years. Two, our TCVs are moving in the right direction. Consistently improving track record in large deals, q uarterly wins of $1.225 billion on an LTM basis keep to our rising TCV run rate trend, with current average quarterly TCV run rate at $10 million+.
Improving client mining metrics across revenue buckets continues to strengthen our diversifying growth. We added one more client to the over $150 million bucket, and our average top five clients' contribution for FY 2022 is $150 million.
60% client growth well above our direct revenue growth is 59% retained growth, while 11 to 2020 clients have grown at 24%. Third, all our verticals registered double-digit growth trajectories, in particular in our core market, the U.S., in our core vertical BFS and core applications service line all continue to sustain market leading growth. Fourth, our talent strategy is on course.
Our utilization reflects our efforts to infuse our talent supply chain with more freshers and optimize productivity. Our overall utilization has moved up by 2 percentage points offshore and 1 percentage point onshore, impacting the trends we called out for in the last quarter and providing additional operating leverage to further expansion. Our operating cash flow generation as a percentage of pro forma taxes 100 plus % in FY 2021 and FY 2022.
Third, investing for growth by using operating leverage and operating in a steady target operating margin plan. We believe that our margin stance ensures stability while managing through key workflows and strategies in a tough supply environment. Our EBIT margin of 15.3% lies in the stated 16.25%-17% plan and our adjusted EBIT margin of 15.8% is stable sequentially and annually.
As already mentioned, our gross margins have improved 168 YOY, noteworthy in a high cost supply side environment. Coming to our FY 2023 outlook. Given the rising macro uncertainties, we've taken a closer look at the outlook, and we feel confident that the demand trends and tailwinds with current order book give us the visibility to continue to drive growth.
We expect growth to accelerate through the remainder of FY 23, especially with the green shoots from the supply side and constraints having peaked in the recent quarter. Our confidence stems from the following. Continuing market share gains with clients across tiers and verticals, o ngoing robust spending plans of a high quality client base.
Ongoing addressable market expansion as we extend in new client competencies, including M&A and market presence. Strength of a pipeline and track record of converting pipeline to TCV and TCV to revenue. Pricing, growth leverage, and pyramid support our FY 2023 margin outlook after providing for rising supply side costs. With that, I'm gonna open it up for questions and answers. Back to you, operator.
Thank you very much, Mr. Rakesh. We will now begin the question-and-answer session. To ask a question, please click on the Audio Question tab near the media player. Click on OK on the popup to mute your webcast and to proceed with live Q&A session. The operator will announce your name when it is your turn to ask a question. Please unmute your microphone to proceed with your question.
To ask a text question, please type your questions in the text box and click Submit. Your questions will be addressed by the panel members. Participants connected on the telephone may enter star and one on their touchtone telephone. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.
Hi. Good morning, and thank you for taking my question. My first question was around the deal win side. Q1 for us typically is a TCV strong quarter for booking deal wins. This particular quarter we have seen a moderation in deal wins year-on-year.
Even if you take the $160 million-plus deal win which you won in this month. Despite that, it looks like some moderation which we have seen on the deal win side. Can you maybe give just some color on what we are seeing on the deal win side at the moment of slowing down in continuation to what you said that TCV to revenue conversion has slowed in Europe.
Kumar, I think, there is a certain nuance that I want to just point out, t here's a base effect at play w e announced the last $250 million ten-year deal in the same quarter last year. I think if you compare it on a YOY, Q1 to Q1, you will see a little bit of that aberration. $250 ten-year, not a regular lumpy, y ou know, the large deals are by definition lumpy.
If you look at the $365 million number for, you know, Q1, quarter deal kind of slipped into Q2, the $60 million dollar deal. I think it's a fairly, you know, a robust flow. We are showing you the pipeline, which is a lead indicator.
The Europe comment was, I think, very specific to the environment that we are operating in, especially in U.K. I don't think there is that we are seeing something similar in the U.S. If anything, the environment in the U.S., especially with onshore, has seen supply constraints, and I think we are starting to kind of make sure that the green shoots that we are seeing kind of start opening up some of those constraints.
We've also expanded other supply you know centers to counter that. I think TCV trends still fairly stable. Pipeline up sequentially 6%, you know, almost 10% YOY.
With this, you know, this point in time in the segments we are operating in, you know, which is U.S. banking, financial services, healthcare, you know, even transportation, BFS not really seeing major impact on the pipeline. As I mentioned, you know, there are some customers that are watching for trends, t here are a very few handful that have got some big boost from post-COVID and now are starting to kind of see a little bit more normalization in their business.
I think that's more an aberration. Broadly, not really seeing any major short-term, medium-term impact because the nuance again in the pipeline and the demand is driven by which part of the value chain you play in. I think where we are playing, which is digital transformation, cloud-based work, data platforms, I don't think there is any moderation in demand.
Great. Thanks for that, Nitin. My second question was around the comment which you made that we expect growth to accelerate in the coming quarters. When I look at the headcount addition which we have done in this quarter on a quarter-over-quarter and YOY basis, both are lagging behind the revenue growth which we have seen in this quarter. How are we connecting these two divergences with our expectation that revenue is going to accelerate, but headcount is lagging behind that.
Kumar, the 3 data points you need to focus on, not just the headcount standalone. Firstly, the internals of the headcount. If you look at where the headcount is growing and where it is not growing so b etween apps, ITO and BPO, I think both really all app driven and also fairly significant offshore driven.
That is an important data point because obviously the base effects of the residential mortgage market in the U.S. is coming to play right now, and we've seen you know, annual declines in that business, sequentially that business also under stress. I think there is an internal churn there that you need to focus on.
Second, looking at just headcount addition without looking at utilization is a little bit a half story, because given that we are running at 70% utilization offshore and 90% onshore, we still have enough flex in the system to be able to turn those seats available. That's kind of the focus for us in Q1, and potentially will stay the focus in Q2.
Don't be surprised if you see similar trends in Q2, because we have enough lateral as well as fresher non-billable people available for us to continue to migrate into billable projects. And third, and most importantly, there is a 5 percentage point increase in fixed price, where the correlation to headcount is not straight line.
Which I think for a company our size, given the short span of time, has been a pretty significant upgrade, and that is helping also in other areas such as margin. Finally, I think we talked a little bit about it over the last few quarters p ricing phases also going, you know, go into that, especially onshore pricing phases, which is where we've led with the pricing power. I think those are the 3, 4 factors you need to keep in conjunction with, drawing a correlation between, you know, revenue, headcount, utilization, fixed price and rates.
That's super helpful, Nitin. Thank you for that.
Thank you. The next question is from the line of Nitin Jain from Fairview Investments. Please go ahead.
Yeah, thank you for the opportunity. I have two questions. If you could provide any qualitative commentary on how the attrition is panning out and, in terms of, what kind of a trend we are seeing within the company and t he other question is related to the Blink acquisition. Have we been able to leverage the Blink clientele to, you know, win the kind of deal wins we were estimating at the time of acquisition? Thank you.
Sure, Nitin. The first one, I think I called out for it w e are seeing green shoots. Still too early to call, but attrition, while still elevated, seems like it's stabilized potentially in some pockets, even softened, in terms of the trends.
I think that will only continue to improve as the odds we are playing with. Given what is going on in the tech sector in the U.S., the startup community, the crypto sector. I think there's a lot of things that have happened in the last three months that are starting to play into the supply tightness that was going on, you know, I think especially onshore.
Second, I think the opening up of new centers is also a strategy to counter some of these headwinds, I think the Canada center went live this month and we'll continue to expand and rapidly deploy folks in Calgary as per plan.
That's kind of a little bit where the attrition is, i t's still too early to call, but at least green shoots started to appear on stabilization and potential. It looks like it, you know, we are witnessing months of peak. Now whether it takes 3 months to normalize, 6 months to normalize, I think we'll update you as these trends play out.
I do believe that it has given us, you know, a fairly strong signal that we are heading into an environment where if we have good demand, we should be able to, you know, tap into the supply pools. Second, on the Blink acquisition, I think we had our thesis around standalone growth and synergy revenue.
On both counts we are running ahead of the thesis that we went in with. Very pleased with both direct synergy and their standalone growth and a t this point in time, we are very much focused on executing to the reverse synergy which is logging into their accounts. Keeping in mind that their top accounts at this point in time, you know, continue to be fairly engaged with them on their services and w e've been seeing good progress on our plans to integrate.
Okay, just a quick follow-up on the Blink part. Are we seeing it, you know, reflecting in terms of deal wins for Infosys directly? If you could, you know, quantify with numbers or something that would be very helpful.
No, we will abstain from giving quantifiable numbers for a simple reason that you know that it is integrated into our direct business and our NCA business. I think the fact that we are looking at you know significant strong growth coming out of you know the 11-20 as well as NCA segment should give you a clear indication that some of the strategies are working.
Okay. That's helpful. Thank you so much.
Thank you. The next question is from the line of Nitin Padmanabhan from Investec, who has posted his question on the website. The questions are: One, what is the proportion of exposure to capital market customers in the portfolio? Second, how should we think about the Digital Risk on a going forward basis? Thank you.
I think we wouldn't want, really wanna break out exposure to capital markets. What I can tell you that if I stack rank the sub verticals within banking and financial services, capital markets will not be in the top 5 p ure capital markets. I think it's more we are much more focused on consumer bank payments, financial services, in asset and wealth, you know, compared to pure investment banking, capital markets and trading.
I think that from that perspective, the reason why we are still seeing very strong growth in top ten customers, top 5 customers, is again a clear indication of the fact that so far we've not seen softness coming out of any capital markets related, you know, ramp downs. What was the second question was around our Digital Risk business.
I think it's fair to assume that we've obviously seen softening of especially the origination and the refinance business. We did add new lines such as home equity loans that has lumping impact. Obviously that is still playing through the run rate and that's the reason we will as we go through the next quarter or two we will accelerate the growth as we get through the ramp down effect of some of these businesses in the revenue run rate.
I think there was a comment made by one of the analysts around our balance sheet as to the impact of Digital Risk on the profitability. I'll ask Manish to clarify and explain that with some numbers.
Yeah. Actually, the comment was in relation to what we reported in the annual report. Annual report basically takes the legal entity wise reporting and which also includes intercompany dividends. If you were to look at the reported numbers of legal entity the previous 2 years, the profit from Digital Risk business was 2.6% and 8.3%.
While this year it looks like 33%, 33.5%. Majority of that 33.5% is actually because of dividend and s ince we stopped reporting Digital Risk as a separate line item, Digital Risk as a percentage of overall business has come down and its profitability has come down as well. It is nowhere close to the 33% and, you know, we should not draw any conclusions from that, you know, Digital Risk impact will translate to that kind of profit impact on the company.
Thank you. The next question is from the line of Sulabh Govila from Morgan Stanley. Please go ahead.
Yeah, hi. Thanks for taking my question. So, Nitin, on currently top line accounts have done quite well by continuing to gain market share over the past several quarters. The flip side of that is the concentration risk that we see in the current environment specifically. How should we think about that, if the macro were to remain challenging over the next few quarters, how are you thinking about that internally?
Sulabh, I think, I mean, there are 2 sides to the same argument. I'd rather have deep strategic relationships where we are engaged in some heavy lifting for large programs that are less susceptible to ramp downs than having a long list of clients that are quite irrelevant at the end plus because we get consolidated out pretty quick.
I think we'd rather be in the first bucket than in the second bucket. Given that we are not talking about one client being 25-30% of revenue, we are actually talking about three clients over $150 million and top 5 average around $50 million. I think it's still a fairly broad-based top client list that we are talking about.
Having said that, given that top 5 are growing at 30%, next 5 are growing at 39%, and the next 10 are growing at 24%, of course, on a smaller base, I think the growth is actually fairly broad-based so a s long as the growth is broad-based across line segments and across verticals, I think we should be able to manage the risk that you talked about. I would be very worried if there was only one client driving growth and everything else was not driving growth.
All right. And then with respect to fresher availability, by when do you think we should expect the utilization rate move up over the course of next few quarters and drive the growth from a fresher availability perspective?
Yeah. I think we have already seen improvement. As I mentioned, I think the overall utilization is improved by about 2% offshore, 1% onshore. I think we still have room to improve that by 5-6 percentage points. Remember, as we make intake regular part of supply chain, the numbers will actually fluctuate on a, you know, on a quarter-by-quarter basis, especially the intake that actually happens in the later part of the calendar year.
I think there is an upward trend to utilization w e do expect to move up. We are very focused on converting the current, you know, non-billable headcount to billable, which is the reason I mentioned that there may not be a direct correlation between net headcount adds and, as you know, available billability or revenue adds.
I think we are at this point in time, you know, we have some work to do, like the supply chain optimization that we started last year continues through with a combination of fresher intake, upward rotation and globalization of supply chain. I think all of these 3 will add towards the utilization. There is an upward bias to the utilization number, especially given the strong focus that we've given on converting offshore resources.
Okay and then l ast bit on the margin band. Just trying to understand the relevance of the upper band of 17% margins in the current year. Would it be fair to assume that margins would be more like towards the lower end in FY 2023?
Sulabh, Manish, there are uncertainties in the environment which could mean both negative and positive it currently be more the negative than the positive. Given quite a bit of tailwinds to the margins are structural in nature, D&A charges, more amortization as well as compensation t hose are kind of upsides to the bottom line.
So if we don't see any further significant headwinds, you know, there is a possibility that we may certainly be looking at a significant expansion in the margin. As supply constraint becomes clearer, whether it will continue to be there or it reduces, we know better whether we will come closer to the top end or not.
There certainly will be an upward bias to the margins, as we had said last time when we said the lower end higher than the previous quarters. We actually delivered even basis points, but more than the lower end of the quarters.
Sure. That's all from my side. Thanks for taking my questions.
Thank you. The next question is from the line of Bhupesh Singh from Choice International. Please go ahead.
Um.
As there is no response from the current participant, we move to the next question from the line of Mukesh Kumar from MG Global. Please go ahead.
Yeah. Thanks for the opportunity, c ouple of questions. Starting with utilization. Nitin, just want to understand why can't we sustain utilization at 78, 80% or maybe up to 82% with growth? If it's trainee, what expense, whether skill mismatch or efficient over some things, why we are not able to sustain?
Because some of your peers can sustain utilization with sustainable growth trajectory. This is question one. Second question is about insurance business. It is showing weakness even if I look how segments okay. It is lower, 500 basis points lower than even pre-COVID era. Could you please tell us something about insurance business? Thank you.
Yeah. I think on the utilization front, Mukesh Kumar, you have to realize that, still here, I think the question you used to ask us is why you don't hire trainees and your peers are hiring trainees. I think the answer is very simple. We started a supply chain transformation program this time last year.
I talked about the fact that we have 5,500 freshers for the first time in that larger proportion of our overall workforce in the last quarter of FY 2022 and t hat's the change management program that we're running internally. We did guide that utilization will stay low for a period of time as we absorb these. You have already answered part of the question because we have significant portion of our business that comes from transformation programs.
The ability to deploy, the ability to recover, the ability to absorb them in those strategic change programs, I think that's a long-winded cycle, and that's a core. Many of our peers have been on this journey longer, w e were not able to go on this journey much longer because we had to prolong.
Over FY 20, 21 and 22, we were obviously bringing, you know, people, our DXC people's business into direct as they were ramping down and w e couldn't really afford to run a fairly, you know, more than the amount of bench that we ran in that period. I think this is a, I would say, kind of a transition phase for us to transition into a much more pyramid-driven type organization.
Something that is very important for our long-term scalability and growth and I think we have to, you know, build the business, what works for us and what, you know, what's the best supply chain strategy we can run. In that context, I think utilization numbers will be higher, and we will create a virtuous cycle out of the upper rotation and migration. You know, we are fully there yet because we just started the process 2 or 3 quarters ago.
On the insurance question, Mukesh Kumar, you see, despite a 3% decline quarter-on-quarter, we delivered a 22.8% growth on a.
Understood. Just follow up on the first part. I was looking largely at training kind of thing, but broadly I get the sense, in terms of the overall training related thing and every business is changing its communication. The last part is maybe I can raise one question about mortgage business, which partly you addressed. In your opinion, this business for mortgage business will last for how long? Or we largely come out in Q1. Thank you.
Mukesh, that is very hard for us because the environment is fairly fluid on that front. The rates are very volatile. You can look at the 10-year U.S. Treasury and see how much volatility still exists, and the yield moves up around by 50 basis points within a one-week period. I think until the volatility subsides, I don't think you will see the peaking of mortgage rates.
Correct.
The deal-up market is still pretty strong, and we still have backlogs and volumes that we are consuming. We have built these operations to be able to consume resources on both sides, and we've also added some new service lines, especially around clients and as well as servicing.
I think we'll use the last turn in 2018, 2019 to grow this business, consolidate our position, and we're doing the same as we speak. I think the business is obviously in much better shape than it was two years, three years ago. From a portfolio perspective, this is still something that adds a lot of strategic value. We'll continue to watch it, w e continue to believe as the effect runs through the 100, our overall debt growth will 100 actually through the rest of the year and t hat's kind of the commitment as of now.
Okay. The next question is from the line of Abhishek Chandarkar from Centrum Capital. Please go ahead.
Hi, sir. Thanks for the opportunity and previous remarks you made a comment about focus on RGB and, you know, generally. Sir, if you could.
Abhishek, you're not very clear. Yeah, you're not very clear. Yeah, please. Abhishek, thank you.
Yeah. Thank you. My apology. In the prepared remarks, you made a comment about increased focus on RGB spend. Does this create headwinds for volume growth, you know, given automation focus into RGB spend by clients? Any color could be helpful. Thanks for listening to this.
Abhishek, I think, as I mentioned, right, it is not just important to look at demand overall. It is important demand in context to the service lines and the value chain that a company is operating in. It's a fairly unique time and a fairly, you know, different environment.
Even if you head into a slowdown or a recession, the playbook of 2008, 2009 or 2000, 2001 on when you stand up, because what used to be stable in those time periods to me are, you know, the most at risk in this environment. Because the biggest leverage all of our enterprise clients get, which will accelerate the exit from legacy and free up those sunk costs and CapEx investments.
As you see, you know, if you look at demand and if you happen to be a company that is focused on infrastructure services, data center operations, service desk, you will see significant headwinds because those projects will get accelerated from an exit perspective.
If you are a company that is focused on transformation, or change, you know, change the business or the migration from OpEx or bundle run and change through a zero cost transformation concept like we do, then you potentially are at a point where end is probably, you know, the least likely to suffer. I think that's the way you should think about what happens to the portfolio demand in context of the portfolio.
Got that. And just another clarification. If you can help us understand that if a client is on a cloud journey, say from, say calendar year 20, you know, what proportion of his spends would become, you know, traditional or, you know, would go into the maintenance portfolio, let's say in a year 2 or year 3? I mean, where I'm coming from is trying to understand, you know, what portion of the revenue for IT companies becomes, you know, goes into the maintenance part, which could be, you know, up for renewal, in the cloud journey.
Abhishek, it's too soon to actually start counting that because the way you run applications is in a data center environment, even if you are running, you know, AMS or of course you bundle AMS with IMS and whatever was AD, that construct, that equation is actually changing very rapidly. The way you run applications that sit on the cloud is highly virtualized, highly automated CloudOps mindset. It is very much through touchless and, you know, through orchestration and software tools. I think that equation is still being formed.
The big disruption and the biggest change really is the moment the more clients start switching off data centers and interim environments, the more money becomes available to them to spend on change and the faster the change accelerates because that's an immediate kind of way. I think that's the equation we are playing on right now. At this point in time, I think it's too early to see what the split of, you know, cloud applications management versus traditional application management will look like.
All I can tell you is many transformation programs are still in very early stages of application transformation using cloud. Data speaking of stream now, core transformations haven't yet fully started, even though they started enabling using things like neo banking or this. I think this is a macro headwind blip in an early stage of a very large and that's the reason why I think at a secular level, this activity is here to stay for a while.
Great, sir. Thank you for answering my questions and best wishes for your quarter.
Thank you .
Thank you. The next question is from the line of Debashish Mazumdar from BNK Securities. Please go ahead.
Hi, sir. Thank you very much for taking my question. So, I have most of my questions have been answered. I have one query. If we see that the transaction-based line item that we have, which is around 15%-16% of our business. Just wanted to get some sense how much of your business is coming from mortgage related activity and how much is related to others?
Debashish, Manish here. Transaction-based business is a combination of what we do in mortgage and a lot more than that. Including in the application side of things, there are contracts where we actually commit to delivering specific transactions as an outcome.
As we have mentioned earlier, it's extremely hard for us to call out a Digital Risk as a separate source of revenue because it is very much an integrated offer. So, I won't be able to give you a number in that, you know, number, how much is Digital Risk, but it is a subset of that number so y ou know, you should get a sense of how much the Digital Risk business at max could be.
Okay. For our modeling, should we assume that like 90% of this business is Digital Risk-type business?
As you know, Debashish, it's difficult, like I said. I won't recommend you know, make assumption like that for the purpose of the modeling. I mean, unfortunately, despite you know, this question coming up again and again, it is not because we don't want to share, it's just that the model doesn't, you know, allow us to provide number anymore.
Sure. Thank you very much.
Thank you. The next question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.
Okay. Hi, Nitin, Manish. Nitin, sorry to harp again on DR mortgage business. You know, just if you look at. You very rightly said the environment remains very, very fluid. If you look at, you know, your direct business, after many quarters of very, very strong growth, this quarter was a little bit relatively weaker in terms of performance if you look both on QOQ and YOY basis.
You know, was a majority of the relative weakness this quarter in direct was on account of DR or were there other factors which are also contributing? Also, you know, in DR you have been talking about operations and compliance as you know, potential opportunities. What portion of GR are they currently, and you know, can they be big enough in a few quarters to kind of, you know, overpower the processing part which remains weak?
Mukul, I think, firstly, just to correct, data points. On a YOY basis grew 28.6%. I think the number is fairly, you know, top of the chart in terms of performance compared to the industry. Still this is I think the run rate impact of the mortgage. I will call it the mortgage LOB whether you call it DR, because we don't really have that nomenclature internally anymore.
The mortgage LOB was one of the reasons why we called for the Q1 number to be, you know, in the range that it ended up being because we did call for short-term weakness, and I think there's still some more run rate impact that is gonna wash through that.
The fact that we are calling for demand, you know, which will be order book, which will be pipeline-led portion of growth through the remainder of the quarters, and that comes from the fact that in our core market you've seen, you know, as well as in applications outsourcing transformation, we are seeing growth that is 30%-40%.
In US grew 32%, correct? Apps grew 41%, correct. The pipeline is actually fairly geared towards that. I think that's, i n my books, that is where the highest quality of growth sits, and that's where we are actually fairly confident that the pipeline and the order book will actually drive that growth, especially as the supply situation starts to stabilize over the next couple of quarters.
In addition to the mortgage LOB, other weakness came out of the Europe business where the ramp downs were extended out. Even though on a YOY basis it grew, but it, you know, it didn't really keep up with the growth of the direct business.
That's another area of work for us to continue to make sure that not only are we winning more, but we're actually executing faster, despite all the constraints that we are seeing in some of those markets. I think a combination of those two things, but a large impact definitely from the mortgage LOB. On the second question, internals of the mortgage LOB. I think at this point in time it's fair to say that interest rate sensitive driven, you know, refi, is less than half the business, which is, it used to be majority of the business 5 years ago.
Correct. Thanks. The other question, Nitin, I was just trying to, you know, make sense of the commentary which is coming out of your top client. You know, till a few quarters back they were extremely positive on their technology plans over the medium term.
But you know, of late, they have expressed concerns about how the market and, you know, the economy is behaving. You know, while you might not want to comment on their spending plans, just wanted to, you know, kind of, get some sense of, you know, how do you see your exposure in terms of defensibility versus that you mentioned that the capital market is outside top 5, so that's probably you don't have much exposure there. How defensible or sustainable is your exposure to them?
Are you talking about our top clients?
Top client. Prominent client.
We never confirmed who the top client. Difficult for me to give you an answer because I don't know who you're talking about and y ou're assuming that you know who the top is. I tell you, the metric you have to see is the top 5 and top 10 growth. The deal that we are announcing is also coming from one of our top 5 clients.
$60 million announced that we closed in July. Of course, it is unstable w e don't know what they will say, you know, in terms of the banking sector outflows, you know, b ecause a number of happen to be large U.S. banks, our clients are present.
I think at this point in time, we are not seeing the concerns that, you know, you're worried about. We are pretty focused on driving as much consumption as we can from the order book. We are still winning share. In fact, in some of these top clients, the net new change digital spend, we are actually winning almost.
Sure. Thank you.
Thank you. We'll now take questions received on webcast. Next question is from the line of Divesh Mehta from Investec. His question is, one, what is the outlook for Digital Risk business? How much did Digital Risk degrew during the quarter? Second, what are the added margins despite the sharp drop in the utilization? Has the increase in onsite utilization completely offset the lower offshore utilization? Three, any color on margin headwinds and tailwinds for FY 23. Thank you.
Hi, Divesh. Manish here. As I mentioned earlier, we don't keep the Digital Risk business numbers separately. We would hence not also be able to give what was the movement in Digital Risk on a quarter basis. From a margin perspective, if you look at quarter-on-quarter movement, actually there is an improvement in margin utilization both offshore and onsite. It's not that the onsite margin utilization improvement was kind of helping manage the offshore utilization.
Offshore utilization improved 2% and onsite improved by one percentage point. There are puts and takes on margins to your other question. Price increase is one tailwind that we are. Offshore-led apps growth, both of which drives better profits, better realizations is the second. Utilization improvement, though, 2% and 1% is the third one.
As we speak, you know, we are continuing to work on pyramid correction, which is pressure induction. You know, that reduces the average cost and then also has a tailwind on the bottom. These are what has been at play right now other than amortization cost reduction of M&A charges and stock compensation. This continue for a few more quarters to come.
Should we move to next?
Yeah, we can go to the next question, probably.
Yeah. The next question is from the line of Vaibhav Kokate from Ashmore. The question is, one, can you give revenue growth guidance for FY 23? Two, what is the Digital Risk as percentage of revenue in current quarter? Thank you.
This answers remain same, y ou know, we don't have that numbers called out separately. The overall revenue growth for the year Nitin mentioned in his opening remarks. Our momentum continues, p hilosophy for investing in growth while maintaining profitability continues to be there.
We don't call out any numbers or any specific dollar value for the revenue for the year. You know, otherwise, we continue to believe that we will from the pipeline TCV deals that we have had, including the $302 million in Q1 plus the $60 million plus deal that we signed in July. The next question, I think there's one from Mohit as well.
Yes. The question from Mohit Jain is. He's from Anand Rathi. The question is, How big is the BPO mortgage business for us, and how do you see it progress through the year? Can it potentially impact our direct business growth for FY 23? Any trends here would be helpful. Thank you.
Like I mentioned earlier, we don't call out the numbers specifically. Last quarter talked about the fact that we are seeing headwinds in this business. Some of it had already impacted Q3 numbers, some of it impacted Q4, and it certainly had impacted Q1 numbers as well. The complementary services that we have built and Nitin's comment around our ability to now take volumes in HELOC, we don't expect it to have any material impact on the numbers, you know, as we go forward.
Guys, I just want to make a comment that, you know, almost everybody wants to know more on a percentage of revenue. I think it's really hard because a lot of these lines are integrated into everything we do. Bring out the platform to building, you know, the data to doing the underwriting, putting regulatory compliance. It's very hard for us to continue to, you know, to demarcate service line contract by contract.
It's not that we are not, you know, we're trying to be evasive, it's just that it's hard to estimate because it's gonna give you guys, it's actually gonna be inaccurate given the way the business is integrated. I think there is obviously concerns coming out of the environment.
I think that's part of the run rate impact we've already seen 50% decline in volumes is the headline number that you guys saw from the U.S. new originations, n ot our industry, n ot our number, but the industry number. Obviously, you know, a lot of that impact has. Despite that impact on a comp basis, we've grown our banking business in the high 20s, 28%. That should give you a sense that the business is much more broad-based than you guys are worrying about right now.
I think this is not, you know, this is not an environment where we have a significant portion of revenue at risk, unlike what we had with another situation years ago, where I think the profit used to be on that one client, which was, you know, committed by for 5 years. This is a very different situation. My request will be to not equate this environment with what happened three years ago, which we by the way also quite well in the last 2 years. I think focus on where the quality of growth from, focus on the pipeline and conversion rates.
Focus on growth, which is, again, despite having, you know, this business represented in many of those top clients, top 10 accounts have grown 30%, and that's the metric that you guys need to focus on.
Thank you. The next question is from the line of Devang Shah from IDBI Capital. Please go ahead, sir.
Yeah. Hi. Thank you for taking my question. I have just one question. Your on-site BPO headcount has declined on Q2 basis. Can you help me with that?
I think it's it basically links to the internals changing from the declines mostly came from the remote business that obviously we talked about quite extensively in the last 60 minutes and t here's basically a correlation between what you're seeing in the BPO onshore numbers and total company growth mix.
Thank you.
Thank you. The next question is from the line of Rahul Jain from Dolat Capital. Please go ahead.
Yeah. Hi. Thanks for the opportunity. I think somewhere you commented about the tailwind on the margin which you may have. Any bit of color in terms of what all could be those factors? One, of course, is currency and our median remuneration last year was also high relatively. Is that what is an incremental thing with softening, relatively softening of the supply side problem and remuneration already being high for us on the portfolio basis? Is those the thing other than currencies that you have?
Rahul, Manish, you know, the primary ones that we talked about is the tailwind of price increase, the potential opportunity to expand utilization. The growth coming from an offshore-centric revenue will both basically come with higher margins and t he stock compensation and M&A charges that have been given continuing to decline in absolute terms, actually declining even faster on an operating terms.
Beyond this, there are operational initiatives being taken, including starting to invest in building the fresher muscle, which had kind of put to rest for some time, given we were trying to redeploy colleagues coming out of the DXC decline and t hat also as it kicks in should start giving us operational benefits in margin expansion.
Yeah, yeah. Of course, these things you alluded to what I was asking is that finally, probably on the salary side of it, can we say that our base right now, the changes that we might have made last year are so adequate that that would not be a headwind to us or it could be similar cycle this year as well?
Compensation as a philosophy, you know, Nitin talked about us using talent mix and a key quotient, where upgrade in the skills translating to increased deliverability automatically translates to an compensation and t hat's a perpetual continuous cycle, y ou know, as you would relate to it's about because you pay more if you make more so I don't think it will be a once in a year kind of an event. Given the way it is conducted, it create a margin headwind, so to speak.
Right. Just one follow-up for Nitin. I mean, the way you are articulating, is it safer to assume the positioning that we have with our clients and the kind of size of the business we have and whatever macro reading we have right now, we can continue to deliver the same growth as we might be thinking let's say 6-7 months back for our business for this year and year to come?
Yeah. I think at this point, you know, we are not really changing any of our stance, either on growth or on the tailwinds that Manish just talked about on the margin side. I think it requires us to stay focused on executing what we have at hand, and of course expand our market share further, because we do believe that there will be opportunities in the next 2-4 quarters in actual further consolidation with our existing client base, as they start thinking about a set of partners that can actually help them further their agenda on transformation.
Got it. I appreciate the color. Thanks a lot and best of luck.
Thank you, guys.
Thank you.
Thank you. As there are no further questions from the participant, I now hand the conference over to Mr. Nitin Rakesh for closing comments. Over to you, sir.
I just want to thank you all for continued interest in Mphasis and your sustained investment in time and effort. I think we are very focused driving our clients towards the features that they're all looking towards. We believe, as I mentioned, that unique opportunities in the near to medium term to further consolidate our position with many of our clients both, you know, old and new, and we stay focused on executing to that vision. Thank you again, and we look forward to talking to you next quarter.
Thank you, sir. Ladies and gentlemen, on behalf of Mphasis Limited, this concludes this conference. If you have any further questions, please reach out to Mphasis Investor Relations team on investor.relations@mphasis.com. Thank you for joining us, and you may now disconnect your lines.