Ladies and gentlemen, good day and welcome to the Mphasis fourth quarter and FY 2022 earnings call. At this moment, all participants are in listen only mode. Later, we will conduct a question and answer session. At that time, you may click on the Audio Question tab below the media player. Please note that this conference is being recorded. You can also view the presentation on the Mphasis website www.mphasis.com under the investor section as well as on the stock exchange websites. I now hand the conference over to Suraj Degawalkar from CDR. Thank you and over to you, sir.
Thanks, Aman. Good morning, everyone, and thank you for joining us on Mphasis Limited Q4 FY 2022 earnings conference call. We have with us today Mr. Nitin Rakesh, Chief Executive Officer, and Mr. Manish Dugar, Chief Financial Officer. 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. Detailed statement in this regard is available on the Q4 results release that has been sent out to all of you earlier. I now hand over the floor to Nitin to begin the proceeding of this call. Thank you and over to you, Nitin.
Thank you, Suraj. Good morning, everyone, and thank you for joining our earnings call this morning. We apologize for the slight delay because we had to wait for the deck to get uploaded to the exchange portal. As we completed FY 2022 and moved into FY 2023, we took stock of key themes shaping our industry, what our clients are saying, and the spend patterns. What we see here is the IT forecast from calendar Q1 2022. Respondents, which are typically large enterprises, said they expect to increase their 2022 IT budgets relative to 2021 actuals. At least three-fourths of the enterprises in every industry group intended to increase their tech spends in 2022, with spending targets strongest in software and retail, with over 90% looking to spend more.
In our view, the macro issues that have surfaced and intensified over the last couple of months are not likely to change the bigger secular picture. That being said, some enterprises may tactically reexamine some portions of their tech spends, depending on the nature and geography of exposure in 2022 and how the macro plays out. Secular themes that are driving optimism for 2022 spends and beyond include cloud migration and cloud ops, data platforms and analytics, DevOps and SRE, cybersecurity and digital design and customer experience. There seems to be a clear linkage between tech savviness and financial performance, and this study shows that tech-savvy enterprises have outperformed their peers by 6% on average during the pandemic.
At the high end of the outperformance spectrum are industries where tech is essential to business model transformation, such as retail, or that have been late digital tech adopters such as energy and utilities, insurance and travel. Increasingly, cloud and AI are becoming performance differentiators. With established linkages between tech savviness and revenue/market share performance, we believe that the lion's share of tech spending is not discretionary and is likely among the last places that enterprises will look to curtail spending in response to any macro concerns. Moving on to our performance for the quarter and the year. Our fourth quarter FY 2022 revenue at 26.8% YOY growth in constant currency terms is at a decade high with dollar $43.7 million for the quarter, representing a 4.3% sequential growth.
Our direct business has crossed the quarterly run rate of $400 million and it grew 4.7% quarter-on-quarter and 39.6% year-on-year in constant currency terms in the fourth quarter. The year-on-year overall and direct growth of the company has been rising throughout FY 2022 and ended on a high note in fourth quarter due to the emerging convergence of overall growth with direct growth as we have called out through the year. Our U.S. geography for direct had robust growth of 43% year-on-year in fourth quarter over fourth quarter 2021 in constant currency terms. Q4 rounds out our strong performance in FY 2022, where we recorded an overall FY 2022 revenue growth of 21.2% in constant currency terms, which places us well above the industry average in FY 2022.
Our FY 2022 direct revenues grew to 34.4% in CC terms, which we believe is industry-leading growth among our peer group. On an organic basis, direct business grew 30+% in CC terms in FY 2022. This follows what was our industry-leading growth of 17% in FY 2021 for the direct business. Our core markets, the US and our investment market Europe, have both grown well on a full year basis. Direct business accounted for 92% of overall revenue in FY 2022 and 93% for fourth quarter FY 2022. DHC's contribution to our revenues is 5% as of fourth quarter. Given the low and declining contribution of DHC to our overall revenue, direct business' industry-leading growth reflects an overall improving YOY revenue growth trend sequentially through FY 2022.
With regard to geography growth, U.S. and Europe have fared well with an overall growth of 25% and 15% respectively in CC. Excluding DHC, the growth numbers are significantly higher at 34% and 25% respectively. As mentioned in our earlier calls, Europe continues to be a focus area for us, and we are pleased with the fact that our increased sales efforts and investments in this region are yielding good results. Direct business in Europe has grown at over 20% YOY in constant currency terms for a second successive year. From a services perspective, our application service line has been a driver of our growth with 44% growth in direct apps in FY 2022, thanks to the secular themes of digitalization and transformation. Notably, direct apps growth in fourth quarter was 51.4%.
We believe this is also a testament to our continued investments in the right service areas using a unique Tribes & Squads-led competency development model, as well as our ability to leverage the repeatability that comes with this highly efficient mode of go-to-market. All our verticals saw strong double-digit growth in FY 2022. We are pleased with the continued growth in our anchor vertical, BFS, which grew 27% in FY 2022 in constant currency terms. Fourth quarter 2022 marks the seventh straight quarter of 20+% year-over-year revenue growth in BFS. In fourth quarter, BFS grew 40% YOY over fourth quarter 2021 in constant currency terms. On a full year basis, we believe this is best-in-class growth that is in that industry segment. We continue to enjoy market share gains with our key BFS clients.
Logistics and transportation business in the direct segment grew 32.6% in FY 2022 over 2021 in constant currency terms. Hi-Tech, also a focus vertical for us, continued to deliver strong growth with the TMT vertical business having more than doubled in FY 2022 with 110% growth in constant currency terms, following from a 54% growth in FY 2021. In our direct business, four of our five verticals grew 30+% in FY 2022 in constant currency terms. Also, in the fourth quarter, our contribution of fixed price engagements continues to rise with, you know, fourth quarter fixed price growth of 64% YOY in constant currency terms. Contribution of FP as a percentage of revenue has also risen by 470 basis points YOY in the direct business.
On an annual basis, as I mentioned, four out of our five verticals have grown 30%+ in fourth quarter over 2021 in constant currency terms. FY 2022 also builds on our client mining improvement. As we said before, we've consolidated our standing with our key clients, resulting in continued market share gains. This is also borne out by our client metrics. The middle chart in this slide shows that our top five and top ten clients have grown consistently, registering 31% and 35% growth respectively in FY 2022 in US dollar terms. Our top two clients contributed $151 million+ of revenue each in FY 2022. The average contribution of our top client exceeds $140 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.
Client category 6-10 grew 48% in FY 2022, sustaining a trajectory of much higher than average growth in this category. Notably, even our top 11-20 clients grew 24% for the year, indicating the increasingly broad-based nature of our growth. Our new client revenue continues to grow rapidly, growing at 60% year-over-year in the fourth quarter. In short, our strong client performance across the board supports our industry-leading growth in direct. Several capability and organization-based factors support our consistent and robust performance in the direct business. Namely, our personalized customer engagement model with key clients, where the customer is the center of our go-to-market and resource allocation, which allows for a high degree of account-specific innovation.
Secondly, our ability to build ever-growing pipeline on the back of our effective private model, which provides us good visibility into the future. Third, our capacity to stitch large integrated deals using our transformation models, such as Front2Back and Zero-based Cost Transformation, which we have discussed with you in the past, also gives us the ability to fuel large deals on a regular basis, including 5 large deals this quarter, a new record. Finally, the scaling of our digital competencies of our talent with a well-established learning and resourcing platform, TalentNext, which has seen rapid adoption through this year, especially in the last 2- 3 quarters. TalentNext provides Mphasis to skill muscle to enable execution of the next-gen positioning at scale. We recorded TCV of $347 million of net new deals in fourth quarter.
Our average TCV metric is trending up over time. Our FY 2022 net new TCV at $1.43 billion is up 28% over FY 2021, crossing a quarterly average of $350 million. 73% of the TCV is in new-gen areas. Our large deals are increasingly coming from non-core sectors, smaller verticals and geographies other than the US, while we continue to also mine very well within our chosen marquee verticals. Despite strong TCV ramp up over the last few quarters, our pipeline is still up, suggesting that our pipeline generation engine is firing. We generate a high percentage of our TCV through proactive deal pursuits, where win rates are materially higher than in competitive RFP situations.
I'm pleased to report this quarter that we've closed more large deals than normal at 5 large deals versus 1-2 large deals on average every quarter. FY 2022 also has been the best year for large deals with a record 12 such deals. As we report our TCV on a net new basis excluding renewals, we find the correlation between our direct TCV and revenue growth continues to be high, exceeding 0.9. Coming to our client metrics, our track record in migrating clients from one revenue bucket to the next continues to be healthy. We added two clients to the $150 million-plus category in FY 2022. Specifically, our conversion ratio of clients in one revenue tier to the next continues to be high at over 50%, as demonstrated by the growth of top two accounts into the next category.
This ratio increases in the higher categories as we move from $20 million to $50 million, $50 million to $75 million, and so on. We continue to see success with our focused account-centric strategies with both our tenured and recent clients. In particular, we are also very pleased with the results of our new client acquisition engine. Through the NCA and our focus on high-quality scalable logos, we've been able to sign up at least 12 Fortune 500 companies and another 6 via M&A across the verticals in FY 2022. This is not incidental as we have reinvigorated this program with a dedicated leadership. As we mentioned before, we've carved out five well-considered select verticals to focus on for NCAs. As we now call them Enterprise five, namely banking and financial services, insurance, logistics, TMT, and healthcare.
Each of these five new client acquisition verticals has its respective client acquisition strategies led by dedicated sales, delivery, and leadership. We have an elaborate operating model in place to transition clients to strategic status with the client engagement structure and investments defined through the phases of this 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 go-to-market motions in engaging with such accounts. What's behind our strong TCV record is our evolving Tribes & Squads model. This model, which has helped us scale our ability to service the growing pipeline and to close more deals, continues to mature. The portfolio squads within each tribe ensure that we constantly evolve our solutions and offering the newer tools and methodologies.
To cater to our customers' need for speed, the tribes have also evolved a composable approach to these offerings. This enables us to combine offerings from multiple tribes effectively to address the typical requirements of our customers. We've 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 the specific domain or even specific customer by our deal squads. Almost all of our pipeline is tribe-driven. Our tribes-led pipeline is up 14% year-over-year, despite record conversion from pipeline to new TCV sold in FY 2022. Coming to 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.
In this quarter, we were able to absorb our RSU costs fully and manage organic margins in the stated 15.5%-17% band on an adjusted basis. This has resulted in operating profit growth in line with the revenue growth and adjusted EPS growth ahead of our operating profit growth. Adjusted for M&A-related charges, operating profit grew 5.3% sequentially and 28.7% year-over-year to INR 5,217 million in fourth quarter FY 2022. Adjusted operating margin was stable quarter-over-quarter and declined 20 basis- points year-over-year to 15.9% in fourth quarter.
This is in line with our stated operating margin band of 15.5%-17%, which remained unchanged despite the RSU stock costs we incurred of approximately 100 basis points in this quarter, up 40 basis points on account of full quarter impact. Our adjusted EPS for the quarter at 22.1 grew 8.9% sequentially and 30.3% year-over-year. To sum it up, I will leave you with three points. One, we closed a strong FY 2022 marked by above industry overall revenue growth and industry-leading growth in direct. Direct growth in FY 2022 is 34.4%, marked by 30+% year-over-year growth in all four quarters. Direct performance has helped us mitigate the declines in DXC, the contribution of which is now reduced to 5% of revenue in the fourth quarter.
Two, all KPIs are moving in the right direction, namely our consistently improving track record in large deals with a record 12 deals signed in FY 2022 and 5 in the fourth quarter FY 2022. Our FY 2022 TCV at $1.43 billion is up 28% year-over-year, following on a 51% growth in FY 2021. Our client mining metrics across revenue buckets continues to strengthen our diversifying growth. As I previously stated, our average top five client FY 2022 contribution is $140 million. Our top six to ten clients continue to grow well above our direct revenue growth, with 48% growth in FY 2022, while the 11 to 20 client category have also grown strong, healthy double digits.
The broad-based nature of growth with Europe and multiple verticals is additive to our overall strong growth from the anchor vertical of BFS and geography of US. 4 of the 5 verticals registered 30+% growth in direct. Fourth, our talent management strategy is on course with sustained onshore expansion and capability buildup. Pyramid is a key focus area for FY 2023. In keeping with this, we have seen robust fresher addition in the second half of FY 2022. Our operating cash flow generation as a percentage of PAT is 100+% in FY 2021 and FY 2022. Finally, investing for growth by using operating leverage and operating in a stated target operating margin band continues to be the philosophy. We believe our margin stance ensures margin stability, managing for key workforce retention strategies in a tough supply environment.
Our adjusted EBIT margin of 15.9% lies in the stated 15.5%-17% band, even after including RSU costs of 120 basis points for the full quarter. Coming to our FY 2023 outlook. Given the consistency in outcomes from our executing our strategy, we are confident of sustaining our market-leading growth trajectory indeed for the third straight year while maintaining EBIT margins in the 15.25%-17% range for FY 2023 or 2023 on a reported basis. Our confidence stems from our continuing market share gains with clients across tiers and verticals, robust spending plans of our high-quality client base, ongoing addressable market expansion as we extend and deepen our competencies, including through M&A, and the strength of our pipeline and track record of converting pipeline into TCV and TCV into revenue.
FY 2023 will also see a substantially lower drag to growth from DHC than we had in FY 2022. Pricing, growth leverage, and pyramid support our FY 2023 margin outlook after providing for rising supply costs. With that, we open the call up for question and answers. Operator, back to you.
Thank you very much. We will now begin the question and answer session. To ask a question, please click on the Audio Question tab below the media player. Click on Okay on the popup to mute your webcast to proceed with your 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 question in the text box and click Submit. The question shall be addressed by the panel members. Participants on the telephone may enter star one on their telephone keypad. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have a first question from the line of Vimal Gohil from Union AMC. Please go ahead.
Yeah, thank you for the opportunity and, congratulations on a very strong FY 2022. Sir, first of all, just a data point. If you could help me with what was the contribution for Blink in our direct business for FY 2022. That's one data point. The second question is a two-part question. One is the overall impact of the rising interest rates on US BFSI and specifically also your, the second part will be what will be the impact on your mortgage business that is the Digital Risk business. If you could just highlight if you're seeing any sort of pain there.
Given the rising interest rates, do you see banks across, especially the legacy banks in the United States, sort of cutting down spend temporarily or some pain in FY 2023? Thank you.
I think on the Blink question, the revenue for the quarter is around $11 million, and also it has grown quite robustly quarter-over-quarter. From a sequential growth perspective, this is fully baked this was fully baked into our Q3 numbers as well, so I think that's a good way to look at sequential growth on an organic basis. On the other question around the macro environment and the demand situation, I think at this point it's fair to say that while there have been concerns raised and some of the bank earnings have talked about higher provisions, at this point, you know, the demand is still fairly, you know, robust.
The programs that many of our clients started in FY 2021-2022 continue to be longer term secular programs, as I mentioned in my script. Unlikely that they'll get, you know, curtailed very significantly, you know, even if the environment worsens from here. Of course, we'll keep an eye on for how that, you know, translates into budgets and additional, you know, incremental spend from here on, but at least at this point in time, pipeline, TCV, demand conversations all very robust. We talked about 5 large deals this quarter. That's the record ever. You know, many of those deals are also in-year spend deals, and that's a trend that we started seeing over the last few quarters as the CapEx to OpEx conversion happens.
I think, you know, in a nutshell, not much to report in terms of tangible shifts in spend, but of course, conversations and cautiousness around interest rate and geopolitics continue to become part of the conversations, and we'll continue to watch it very closely. The other question you had was around the interest rate environment and the impact on the mortgage business. I mean, that business is cyclical. There is a part of that in our mortgage bucket that has cyclicality, but we've also diversified that over the last few years in adding new lines of business that are less immune to interest rate cycles, and in some cases, even counter to the cycle.
For example, it is not just about originations and refinance, it's about originations, refinance, servicing, due diligence, and most importantly, home equity line, which, you know, the last three of them are actually countercyclical to interest rates. I think, you know, while there will be some short-term impact, but we believe that we've baked that into our outlook for the full year, and we're fairly confident that as a, at a portfolio level, we'll continue to find ways to drive growth.
Fair enough. Sir, just one clarification on so what was the total contribution for Blink for FY 2022? It was 11% in,
No, it was $11 billion in Q4.
It was $11 billion in Q4.
$11 billion in Q4.
It was INR 23 million for the full year, Suman. Got it, sir. Thank you so much, sir, and have a good day.
Thank you. We have our next question from the line of Mohit from Anand Rathi. Please go ahead.
Yeah. More on the operational side. You spoke about this little slowdown potentially on the mortgage side or which is reflected in BFS side in this particular quarter. How should we read BFSI growth as a whole? Like, insurance is doing well, but BFS side, what do you guys expect? I mean, this quarter was a little slower compared to the previous one. Second was on the utilization. You gave this margin outlook, but the utilization dropped quite sharply in Q4. How should we read utilization number, and where do you expect it to stabilize going forward?
Let me answer the utilization question first. I think utilization is a direct correlation of the supply chain transformation that we talked about over the last two quarters. We've onboarded more than 5,500 freshers in the last two quarters alone, and that obviously will have an impact on utilization. Not only including freshers, even excluding freshers. Because as they go out of training, they get excluded from the trainee number, but they are still sitting in accounts and still to be deployed into billable roles. I think the utilization metric will continue to be monitored and managed closely, but at the same time, we don't expect it to improve sharply.
Even though, even without that sharp improvement, we do expect it to be a tailwind to margins because effectively we are constructing the lower half of the pyramid in a very consistent, methodical and sustainable manner. I think that's the way to think about the utilization metric. It is definitely a planned conscious effort at diversifying across the pyramid. In terms of the BFS growth, I think we obviously had a very strong growth through FY 2022. Even if you look at the fourth quarter number, it grew 39.3% on a YOY basis. We actually don't call it BFS anymore, it's BFSI. Insurance is shown out as separate.
Strong sequential growth, still recovering on a YOY basis because of the restructuring we did in that over the last 12-18 months. Outlook for the year in BFS continues to be, you know, as I mentioned, the application-led growth is very, very strong. Yes, there'll be some impact, as I mentioned, from the interest rate cyclicality, but we believe that the guidance we've given for direct business growth for the year reflects all of those percentages, including BFS.
Okay. Last thing was on onsite offshore, like we are still a little far from others in that ratio. How should we read it? Now you have already increased fresher intake. If you could share any number for FY 2023 fresher hiring and onsite offshore, how much shift do you expect to happen over, let's say, next 1 to 2 years?
I think the onsite offshore ratio has moved in favor of offshore this quarter, compared to previous quarter as well as previous year. I think the trajectory and the pipeline suggests that migration should continue. We not necessarily use market benchmarks because portfolios are different, verticals are different, service lines and the whole competency model is different. I think we are also. You know, it's not just onshore, offshore, it's also multi-shore right now. We are using a best shore approach, given that we've actually added multiple geographies in non-India bucket over the last eighteen months, including Taiwan, Mexico, you know, Estonia, and more recently Canada. I think for us, the answer is, how do we manage the portfolio mix? It's not just one metric and one benchmark.
In terms of the guidance towards fresher hiring, I think we will, we'll continue to optimize the pyramid. That's the roadmap we are committed to. How much fresher intake happens is a question of, how we are able to manage utilization and how much we can afford, based on demand as well as the ability to absorb them through the supply chain. I think it's not one number I can give you. It's too early in the quarter to give you, too early in the year to give you a number for the year. But given that we added 5,500 in the last, two quarters should give you a sense that we are really committed to the supply chain restructuring that we started.
Understood, sir. Taiwan, Mexico, et cetera, would be currently counted as onsite in our reporting?
Yes.
Would it be part of offshore?
No, it's all in, bucketed in the onsite category.
All right, sir. Thank you and all the best.
Thank you. The next question is from the line of Manik Taneja from JM Financial. Please go ahead.
I hope I'm audible.
A little faint, but audible.
Yeah, speak up a little bit.
Yeah. I hope I'm audible.
Yes.
Yes.
Yeah. Thank you for the opportunity. Nitin, just wanted to touch base on something that we used to talk about in the past in terms of the growth within the Blackstone portfolio set of companies. Could you help me understand how this set of company has done over the course of FY 2022, given fact that this is still a smaller piece of contribution to the overall business? How do you see this panning out going forward?
I think you mentioned it, you know, we used to talk about it in the past, and there is a reason why it is in the past. We decided not to break it out as a separate segment because it sits in the direct business. I think it's fair to say that we continue to make good progress. While we are selective, the size of the portfolio that we operate in, not just within Blackstone, but also we actually upgraded that to a PE channel play, is also fairly large. I think we continue to make good progress in that. All I can tell you is that some of those deals are included in the large deal announcements that we made as well.
I think it's a very, you know, considered, I would say a very focused approach, targeted set of customers, targeted set of deals, and we are making good progress, and that's one of the drivers for our direct business growth.
Sure. If I can chip in with one more question. You spoke about the margin levers being growth, pricing leverage and the payroll edge. With regards to pricing, given the concern around increasing interest rates and the possibility that banks look to optimize their spends, do you think this impacts the possibility of price increase in this vertical?
At this point, no, because keep in mind that pricing increase is not just a rate card discussion. There are multiple other ways to construct price increases, value-based pricing, outcome-based pricing, managed services construct. If you look at the fixed price, fixed price construct movement, I gave that metric out in my script. I think all of those give you the ability to actually have a higher realization and potentially a margin tailwind. For new business, for highly you know in-demand skills, cloud architects, data architects, you know modernization deals, there is definitely a lot of you know pricing power available. It all depends on the portfolio and the value that you can derive from those constructs.
I think at this point in time, the environment is pretty comfortable despite the current pressures on inflation that you talked about.
Sure. Thank you and all the best for the future.
Thank you. We have our next question from the line of Nirmal Pali from Sameeksha Capital. Please go ahead.
Yes, sir. Thanks for taking my question. My first question is on the margins front. From the employee expense point of view, we know I know that we do not have a standard cycle of wage increases. On an average throughout the year, what kind of wage increase are we expecting to happen? That is one. Second, the impact of that on margins. Secondly, on the acquisition front, there is a standard cost that was being added. Will that cost remain the same in the coming quarters as well?
Manish Dugar, you can take that.
Yes, Nitin, I can. Good morning, Nirmal. From a people cost perspective, there is a process what we follow wherein, it's a continuous evaluation on the Geek Quotient as we call it, and based on that, a large part of the team, which is primarily the delivery organization, gets evaluated and the correction keeps happening. There's no number that we guide and we have been doing it over the quarters and we continue to do it, so it's baked in. From an acquisition perspective, we had talked about the fact that typically the acquisition charges come from an accelerated accounting perspective, which means the costs are higher in the beginning and then they keep reducing as we go forward.
That is what we expect, you know, to happen in the next maybe four or five quarters. We should be able to absorb that and, you know, it should not have any further impact going forward. To your question on whether the cost is reducing, yes, it is, both in absolute terms and even more in percentage terms, because with the reduction in absolute terms and growth in revenue, the percentage drops even faster.
The reduction in the lower end of our margin guidance, would that primarily be allocable to employee expenses or how should we look at that?
The way to think about it, Nirmal, is we are not reducing the lower end. If you remember, our guidance was 15.5%-17%, and we had talked about an adjustment for M&A charges. Our reported margin this quarter is 15.2% after the M&A charges, and the guidance suggests that on a going forward basis, the margin should be higher than this quarter margin even after accounting for M&A charges. If you were to, let's say, take M&A charges at 0.8%, this quarter is 16%, and we are essentially saying if it remains 0.8%, the next quarter will be 16.05% and so on. It's just adjustment of M&A cost in the guidance range. It's not a reduction in the lower end of the guidance.
Okay. Thank you, sir.
Okay.
Thank you.
If I can just add, I think the way to look at it is that the adjusted reported margin, adjusting for the M&A charge is 15.9%. I think that's actually my comparison to the guidance we started FY 2022 with. Since we've reset it based on the M&A cost, we are basically saying that the fourth quarter number is really the starting point and hence we are guiding above the fourth quarter number even on the lower end. That's the way to think about it for our full year range.
Thank you.
Thank you.
Before we move to our next question, we have a text question from the line of Nitin Padmanabhan from Investec. How should we think about growth for the top five clients, considering you have benefited from significant consolidation in the past two years? The unbilled revenue has increased by $37 million sequentially, while the absolute revenue increase appears to be half of that. Could you give us some context to this?
Let me take the first part of that question, which is on the top five clients, and then Manish can answer the unbilled question. I think, firstly, we're very pleased with the fact that we managed to grow these five, top five, six customers very robustly. I think, in fact, all the top ten clients have grown robustly, as you saw from the metrics in the analyst call, in your analyst deck. The way to think about it is it's not just wallet share gains, Nitin. It's a combination of increased spend, which is the ability to play in new spend areas is extremely important for that. And that's the reason why keeping an eye and constantly reinventing the whole tribe-based competency model with new areas of competency is extremely important.
That's the reason why every quarter when we present, we actually definitely talk about what are we doing in that space, including the changes that we just announced, and then we presented to you a few minutes ago. Increased spend, you know, is in new areas is one big tailwind. Second is we've also taken action to increase our addressable market. Blink was a great example of how we actually now started playing in new spend areas that we were not playing in earlier. That gives you the second vector of growth. The third vector of growth obviously is wallet share gains. I think if you look at these combination of these three things, we do expect that almost all three will continue to play out, at least in the near to medium term.
We don't see any reason to believe that we've actually saturated any account, even from a wallet share perspective alone. Forget the other two engines of growth. I think long road ahead, very pleased with that we've graduated top 2 clients to over $150 million. You know, we've obviously the teams are fairly focused on making sure that we are able to take as much addressable spend as we can because many of these clients spend, you know, the spend is in very large numbers. That's the reason why we also focus on quality of logos that we bring in. That's kind of the way to think about the top 5 to top 10 customers. On the unbilled revenue, Manish, you can take that question.
On the unbilled, Nitin, the primary issues or primary reasons are three. One is there is, you know, typical as you know, the revenue accounting when you do a fixed price contract, is, you know, on a percentage of completion while the invoicing follows a different schedule. So there is a mismatch between that, but, you know, we should be able to catch up, you know, this month, or this quarter. The second thing is about, you know, large part of our clients require a PO, you know, reference when the invoicing is done, and that PO reference at times take time to come, you know. If you take what happened at the end of the quarter, you know.
We should be able to get the documents and raise the invoices in this quarter. I would say largely these are admin and invoicing related matters. Nothing to, you know, conclude that this has any impact on either collectibility or the DSO, so to speak.
Thank you. We'll take the next question from the line of Dipesh Mehta from Emkay Global. Please go ahead.
Yeah. Thanks for the opportunity. A couple of questions. First, about the logistics and transportation. Do you think any implication because of energy-related uptick which we are seeing across the globe? Because this quarter margin seems to be slightly softer as well as the revenue growth. If you can provide some sense how you expect this to play out for FY 2023. Second question is about the emerging business. Can you provide some sense how this emerging business is playing out across some sub-segments? That update would be helpful. Which area is doing well, which is not doing well? The last question is about BFS-related. Because now compliance-related, some of the companies indicated good opportunity because of some of the things and related work and other things. Do we play in that area?
If yes, then how is it helping us for BFS to negate some of these mortgage-related challenges? Thanks.
I think on logistics and transport, I think the issue so far, the inflation adjustment or resale demand is not the real issue. The only reason you're looking at softness probably is base effect. Margin is a reflection of, you know, how much growth and utilization impact is sitting in their vertical because they definitely expect some, you know, they would have done ramp ups in advance or in advance of billing and deal closure. I think see that as a growth related or large deal related ramp up situation versus, you know, any impact or pressure from pricing or demand. On your second question, around BFS related, I think the tech spend, especially in applications area is very robust.
The actions we've taken around diversifying away from pure interest rate sensitives in our market business is also helping. I think we do believe that while as I mentioned in the short run you might see some impacts, but through the year, you know, based on the current scenarios and the movements that we've seen in the forecast and the pipeline we have, it looks like we should be able to meet the full year guidance on BFS overall, you know, despite the softness in some parts of the business. That's the portfolio approach. You know, it helped us. It was a tailwind for a while. You know, that's the reason you have a portfolio where you actually have some parts of the business do better than the others.
On an overall net basis, the portfolio growth is robust. The third question I think was around emerging vertical. I meant, I presume you're referring to others. I think the biggest component of others is Healthcare. There are obviously a couple other miscellaneous smaller verticals in there that we can't classify into the other big four verticals. I think from that perspective, we will start thinking about potentially breaking it out into additional verticals just like we carved out Hi-Tech and Logistics from the others category over the last three years.
I think at this point in time, healthcare is the other primary focus vertical in the other segment that we will potentially, you know, start to report out and carve out separately in the future.
How it is doing? I think that was the question. Healthcare, how it is doing? Logistics, you partly answered, but do you think any headwind because of this energy related uptick which we are seeing or increase-
At this point in time, no. That's what I said, Dipesh. No headwind to report at this point in time. We are watching it. It is not just logistics and, you know, and transport that has an impact from energy because they also have a lot of pricing power, whether it is e-commerce related, you know, or delivery companies or even if you look at, you know, freight companies, if you look at airlines, significant pricing power in, you know, in their hands right now. They're actually passing a lot of the hikes back to the customer. It's not really a stress on their P&L.
On how healthcare is doing, I think, as I mentioned, right, you can see from our deal commentary, we announced a large deal last quarter. The largest deal was in the healthcare unit. In a new customer, despite being one of the smaller units, we were able to actually leverage the Tribes construct, contextualize it to healthcare and grow it. It is actually growing really rapidly. Still relatively small compared to some of the other verticals, and hence we are waiting for it to attain a critical size before we break it out into a separate vertical.
Thanks.
Thank you. The next question is from the line of Vibhor Singhal from PhillipCapital. Please go ahead.
Yeah, hi. Once again thanks for taking my question. This is just a couple of questions from my side. First question was basically on DXC. I know it's just 5% of the revenues and probably doesn't matter much in the overall scheme of things, but I think after multiple quarters of significant decline we've seen, the revenue kind of stabilizing in this quarter. Not really any growth, castles in the air, but what is the outlook for this piece of business at this point of time? Do you think it might have bottomed out? How is it looking out in terms of on the deals and the contracts that we have in this business? Till when is there continuity?
Just maybe some subjective feedback on how should we look at this business going forward. I'll ask my second question.
Yeah. I think we called out maybe over the last quarter, or two that, you know, we are somewhere in the ballpark of, you know, where we think this business can stabilize. I wouldn't read too much into sequential ups and downs based on projects, or engagement. I think it's fair to assume that our focus will be to continue to grow the direct business, and we still believe that we have the ability to have a revenue line with, you know, with this segment. I think the prioritization and the focus of growth, given just the nature of, you know, our strategy will be to prioritize direct growth. I wouldn't read too much into the quarterly moves.
I think 5% is where it kinda be guided towards. If you remember, two quarters ago, they made single-digit number. You know, as the direct business continues to grow, this will obviously continue to get diluted if you know, it doesn't keep up with that growth.
Got it. My next question was basically on the overall supply side environment that you're facing, both on-site and offshore. If you could just take us through, I mean, how is the attrition number looking like in the offshore especially? Do you see it coming down or stabilizing or plateauing out maybe this quarter or maybe this couple of quarters? On similar front, on the on-site front, how critical right now is the availability of talent right now, which is leading to basically high salary expectations. Given the high inflation environment, do you believe the on-site salary hike this year could actually be higher than what we have historically given on the on-site front?
I think the right way to think about it is that definitely the demand supply mismatch continues to be, you know, in favor of shortage of supply. That has been the phenomenon for the last three or four quarters. That doesn't seem to be, you know, any different, you know, at the current environment. But given that over the last, definitely over the last three or four quarters, our focus has not only been, you know, acquiring talent, but actually creating talent, and I talked about that in the script as well, between TalentNext, trainee uptake, and new centers, you know, that we call westshoring, not just on-site, but it's nearshore, it is offshore, it is new locations, whether it's Taiwan or Mexico, Costa Rica, Canada.
Even onshore in Europe, we opened Düsseldorf and Leeds in U.K. I think the flexibility that we are trying to create in the supply chain, from a west shore perspective, is something that is gonna help, you know, mitigate some of the dependence on just, resources available in geographies in the U.S. or in the U.K. market, for example. I think that's one way to mitigate and think about what we're doing. Second is obviously significant, you know, work is happening on pyramid construction, not just offshore but even onshore. Obviously the two markets have a different, you know, way of constructing their pyramid out. You know, yes, there is pressure on supply. Yes, there is wage inflation. We bake all of that into our outlook for margin.
At this point in time, attrition, I would say at best is stable. You know, we will continue to work towards, you know, whatever measures we have taken in the past and additional measures we can take. Not just, you know, wages. It's a lot to do with engagement, it's a lot to do with with internal rotation and upward movement and, you know, potentially quality of work. I think it's a work in progress. It will continue to be. I wish I had a crystal ball to tell you it's gonna peak in this month or this quarter or next month or next quarter. It's you know, impossible to predict.
Right.
I think at this point in time, we have a headcount plan, we have a supply chain plan, we have a demand environment, and we'll continue to find ways to meet as much of the demand as we can.
Got it. On the on-site salary hike front, do you expect it to be higher than historically it has been?
You know, again, as I mentioned, we are managing it through multiple levers. Question is, you know, it is not one number that goes out to one set of employees on-site or offshore. You know, again, since we don't do it in a particular, you know, April one is not the date for the whole company. We are doing it fairly based on need, skill up movement and engagement. I think it's a little bit harder to put a number on it, but I mean, if we expected it to be unusually high, we would have adjusted our margin guidance.
Given that we are guiding for a margin actually to be on an operating basis, you know, healthier than what it has been in the recent past, then I think that should tell you the ability for us to manage, you know, puts and takes on margin and wages.
Got it. Thanks a lot for taking my questions. Wish you all the best.
Thank you.
Thank you. The next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Yeah, thanks for the opportunity. Manish, just wanted to understand in FY 2020. Can you hear me?
You dropped off.
Yes. Hello. You dropped. Yeah.
Keep going.
Yeah. Manish, just wanted to understand in FY 2022, what was the M&A related cost in terms of basis point and how this will look like in FY 2023? Just some clarity is required here.
Sure. You know, first from a concept perspective, once the transaction is done, there is a purchase price allocation that happens and then the cost comes in. The cost is typically on an accelerated basis, which is why, you know, it starts with a higher number and then it eventually goes down. As we had explained, the impact of M&A charges in the P&L was about 0.8% in the immediate. We did the transaction sometime in September. The quarter when the full impact came in was the quarter after that, which is October, November, December. In this quarter, which is January, March, that number has already come down to 0.7%. The reason why the percentage moves is twofold.
One is the absolute cost reduces, and the second is the impact of that on the revenue as the revenue base grows becomes lesser, right? Effectively, we had an impact of 0.8% in October, November, December, and 0.7% in January, February, March. Depending on how the numbers pan out in this year, you know, this number will keep reducing both in absolute and percentage terms on a quarter-on-quarter basis from the 0.7% that we had in January through March.
Okay. Roughly, what could be the visibility sitting in this number in FY 2023 versus FY 2022? Any color on this?
You know, we don't call out specific absolute numbers on this, unfortunately. You know, this will become. You know, we had talked about when we did the announcement of the transaction that over a 2-2.5 years period, we should be able to absorb all of this, and it should have no impact after that. Of which 2.5 quarters has already passed.
Another question, I think.
From that perspective.
Okay. Okay, fair enough. Just last question. You are doing extremely well in direct business. No doubt about that. I think last two quarters order intake was good. Do you believe this quarter's growth rate is in line with your expectation when you entered in the quarter for the direct core or could have been slightly better because of the order intake? And do you believe that there could be a ramp up in the growth going forward in the 1Q and 2Q within direct core?
You know, Nitin talked about the cautious optimism and we would be happier if the supply situation was better. The supply challenges continue. We are investing in creating new sources of supply as well as creating talent through TalentNext. You know, there is enough and more demand. You know, supply is certainly something that we will need to continue working on. You know, when we got into the quarter, we had talked about being industry leading on the direct side, which is what we have delivered for the year. I guess it's difficult to give an absolute number, but relative performance is, I think, what we can talk about, and which is why we have talked about being industry leading on the direct business for FY 2023 as well.
Okay. Thanks and congratulations on recurring great execution quarter after quarter. Thanks.
Thank you. Thanks, Sandeep Shah.
Thank you. We'll take the next question from the line of Harshil Sheth from AUM Fund Advisors. Please go ahead.
Hi, sir. Sir, are we expecting to reach our $2 billion run rate in the current year or what would be our target?
Nishant, you wanna take that?
Hello.
Harshil, you know, what we have talked about is being industry leading so far as the direct business is concerned and, you know, it all depends on how the industry does. You know, last year was a coming back year for the industry, so there is a general assumption that this year will probably be less growth over the previous year than we saw the year, you know, the last year. Depending on how the numbers go, you know, obviously the aspiration is to get not just to the $2 billion, but to higher number. We don't guide a number as you know. We are, you know, confident of getting to industry leading on the direct side.
I understand that, you know, this year the industry growth would be lower compared to last year, but definitely we would be building internal capabilities and, you know, increasing our addressable market size by the Blink acquisition that we had done. You know, I think we would be having a better picture in the near term.
Harshil, the reason why it's an internal
Absolutely.
Yeah, the reason why it's an internal plan is because it's internal. You know, unfortunately, we can't. You know, we're not going to give you what the internal plan calls for. I think you'll have to just make your assumptions based on the trajectory that we've shown.
Okay, no problem. Thank you.
Thank you. We'll take the last question. That is from the line of Abhishek Shindadkar from InCred Capital. Please go ahead.
Thank you for the opportunity and congrats on a good Q4. 3 questions if I may. The first one is, you know, on the Blink growth. Now, when we acquired it was doing 42% CAGR. For the quarter, it's now growing at 20%. So if you can help us understand, you know, what is driving this, you know, solid acceleration. And does it change the assumptions for earn-out in margins? I heard you in the previous question, but probably would like to understand that again. The second is on the margin compression in logistics and transportation vertical. How should we read that? I mean, it's not 1 quarter, but across the 4 quarters of 2022. The third question is, you know, a clarification.
The margin outlook shared, does it? You know, is that excluding M&A and ESOP cost or it includes both these costs? If you can help us understand, that would be great. Thank you for taking my questions.
I think the last one is pretty straightforward. The margin outlook for FY 2023 is all-inclusive based on what we know today. If there is a new M&A transaction that happens during the year, that's a whole different, you know, discussion. At that point, we will give you what the guidance will look like based on what impact that might have. Based on the current, you know, visibility that is the reported margin outlook.
On your first question, around Blink, I think the sequential growth is not 20% but closer to 10%. It is pretty much aligned with the management plan. I don't think there is any dramatic shift in any assumptions or financial impacts given that it, you know, one, it is still a very small percentage of revenue. But, you know, we're very happy that it's performing, you know, as expected, you know, and we constructed our deal thesis based on a certain, you know, thesis, and that thesis is playing out both on standalone and more importantly on direct synergy. I think we are very pleased with the progress.
Again, I would say still relatively early in calling victory, but very pleased with the progress we've made in two quarters that we've worked with them and very pleased with the performance of that business, that team, the alignment and the client feedback. I think on the final question around logistics and travel margins, I think some of it, as I mentioned, is definitely related to the significant ramp-up we've seen. We've also invested dramatically in building new capabilities in new subverticals within logistics and travel. What used to be very much logistics and e-commerce driven is now has a very significant element of other subverticals within the transportation domain, including airlines, because we've seen a significant resurgence of demand.
I think we announced, if you remember this time last year, we made public the launch of an airline data platform in partnership with AWS, and that has become a significant driver of differentiation as well as the ability to attract high-quality new logos in that domain has been very significant. But that has obviously come at a high investment cost. The combination of investing with domain and taking obviously an operating hit on that, as well as, you know, building up teams in advance of ramp-ups and investing with our customers in potentially long-term strategic programs that give us the stickiness and the strategic intent, you know, with their outcomes, is the primary driver of what you're seeing there.
That is helpful, sir. Just a clarification. In the previous earnings call we had mentioned the Blink contribution was $9, and I heard $11 today.
It's 13.5% sequential growth.
The growth rate that.
13.5% sequential growth.
Okay. Fair enough. Okay. Perfect. Thank you. Thank you for taking my question.
Thank you. Ladies and gentlemen, that was our last question for today. I now hand the conference over to Mr. Nitin Rakesh for closing comments. Thank you, and over to you, sir.
Thank you everyone for your interest. Thank you for logging in early into the call. I know the time zones create a little bit of a challenge, but we are appreciative of your interest, and we look forward to talking to you know, after the next quarter earnings as well. Thank you again, and have a good day.
Thank you very much. Ladies and gentlemen, on behalf of Mphasis, that concludes today's call. If you have any further questions, please reach out to Mphasis Investor Relations on investor.relations@mphasis.com. Thank you, everyone. You may now disconnect.