Good morning, ladies and gentlemen, and thank you for joining the Mphasis Q1 FY 2022 earnings conference call. I am Lizanne, your moderator for the day. We have with us today Mr. Nitin Rakesh, CEO of Mphasis, and Mr. Manish Dugar, CFO. As a reminder, there is a webcast link in the call invite mail that the Mphasis management team would be referring to today. The same presentation is also available on the Mphasis website, that is www.mphasis.com, in the investor section under financial and filing as well on both the BSE and NSE websites. Request you to please have the presentation handy. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes.
Please note that this conference is being recorded. I now hand the conference over to Mr. Shiv Muttoo from CDR. Thank you, over to you, sir.
Yeah. Thank you, Lizanne. Good morning, everyone, and thank you for joining us on Mphasis Q1 FY 22 results conference call. We have with us today Mr. Nitin Rakesh, CEO, Mr. Manish Dugar, CFO, and Mr. Viju George, Head Investor Relations. Before we begin, I would like to state that some of the statements 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 FY 22 results release that has been sent out to all of you earlier. I now invite Nitin to begin the proceedings of this call. Over to you, Nitin.
Thank you, Shiv. Good morning, everyone, and thank you for joining the call this morning. I hope all are staying healthy and well. As we step into this new financial year, I look back at the past year and all the events that unfolded throughout the year. It is remarkable how much we have accomplished, not only in terms of financial performance, but also in our commitment to help clients, communities, and our employees. I wish to first thank all Mphasis employees globally for their dedication and relentless efforts in the face of difficult personal challenges during an unprecedented situation. In the midst of this crisis, there were also powerful opportunities. I am glad that we made the investments at the time we did and proud of how we were able to achieve client demands.
Our bring T back into IT strategy enables us to profitably play in higher value and significant digital-led constructs. As we look back at some of the core mega trends that were in play before the crisis, it was clear that the end customer-led disruption was becoming the norm, with expectations shifting dramatically towards a digital native experience, powered and shaped by use of creative technologies that were being deployed in front of the customers. This also led to a pressure on most traditional enterprises to become more agile and responsive, especially in response times, while staying resilient in face of shifting volume and demand patterns. The demand from businesses to their CIO and IT providers was to provide this combination of great customer experience, high agility, while lowering the operating costs, including the costs of associated legacy technology.
The recent crisis is a major accelerant in this regard and has accentuated the need for enterprises to fast-track their transformation programs, leading to a snapback in demand along few major themes such as public and hybrid cloud adoption, data-driven transformation to drive better personalized experiences, as well as to unlock the power of data-driven revenue streams. There is also a renewed focus on core modernization, combined with the themes of cloud and data, as well as investing in building new platforms that can drive a new business architecture aligned towards agility and customer centricity. The investments in consumer-facing tech have also seen an acceleration with a digital-first mindset. All these trends are well captured by our tribes as we have discussed in the past few quarters, and as I will further elaborate shortly. Playing profitably in these themes is instrumental to our market share gains and growth.
Our four-pillar strategy for FY 22 and beyond, as outlined in the last call, is underpinned on building a scalable, sustainable growth firm. To recap, our theme of continuity and acceleration to play profitably in the four tech mega trends identified on the prior slide rests on fortifying four pillars. First is continuously augmenting our capability both from a go-to-market as well as a delivery perspective. This consists of tribes and squads expansion, our true differentiator, which we mentioned before. Specialist resource build-up in our cloud unit, which is structured as a guild foundational to all our tribes. Domain expertise that cuts across all the units that we operate in, across all geographies. Second, geographic expansion of sales and delivery. We recently announced our expansion into Canada to build on our existing operations there.
We are setting up a new Mphasis Canadian headquarters in Calgary, Alberta, in partnership with Government of Alberta and University of Calgary. This is a great showcase of public-private partnership for tech transformation in the region. Through this multifaceted partnership, we plan to co-invest with the university to establish a Quantum City Centre of Excellence that will be dedicated to promoting the commercial application of quantum technologies. Recognized as one of the fastest growing service companies in quantum computing, Mphasis will act as anchor company committed to growing applications of quantum science to users in global market, while enabling fundamental research in quantum science and engineering throughout the university. We are also expanding our expansion on the continent in Europe, with plans for the Nordics and DACH, especially Germany, along with our anchor clients in each of those regions. Third, deepening and broadening of the leadership pool.
We promoted tenured leaders while also bringing in new management talent. Finally, expanding our portfolio of IP-driven AI/ML innovations. We continue to be a market leader in offering our AI/ML and quantum computing solutions to some of the leading technology marketplaces. NEXT Labs continues to be at the forefront of building these innovations. A key component of our continuity and acceleration strategy is the new client acquisition of the NCA Program. We reinvigorated this program over the recent quarters with dedicated leadership. We carved out five well-considered select verticals to focus on for NCAs, namely BFSI and insurance, in both of which our positioning and track record is already strong. These two verticals are large enough to continue to provide growth runway in the long term. Logistics, high tech, and healthcare form the other three verticals on the NCA charter.
Each of these 5 verticals has its respective client acquisition strategies led by dedicated sales, delivery, and domain NCA leadership. We have an elaborate operating model in place to transition NCA clients to strategic client status with a client engagement structure and investments defined through the phases of the transition. We are pleased with the outcomes of our NCA strategy. Our strong growth in high tech is encouraging. We see this becoming the next $100 million vertical. On a quarterly analyzed basis, we are already there. We also see our tech-based propositions and solutions frameworks having valuable use cases in multiple verticals, augmenting our NCA strategy. Another heartening outcome is that today we count all top 10 U.S. banks ranked by asset size among our clients, when 3 years ago we had 5 in this category.
Except for Q1 of FY 21, the pandemic quarter, we have had consistent sequential growth every quarter led by the Direct business growth. Our Direct business growth is accelerating on a larger revenue base. In Q1 FY 22, our overall gross revenue at $362.9 million registered a growth of 6% quarter-over-quarter and 18.8% year-over-year in US dollar terms, and 5.9% quarter-over-quarter and 16.3% year-over-year in constant currency. Direct business continues to power our growth, growing at 10% quarter-over-quarter and 34.7% year-over-year in US dollar terms, and 9.8% quarter-over-quarter and 32.5% year-over-year in constant currency. The trajectory of our Direct annual growth is consistently rising, with the growth topping 32% in this quarter from 7% four quarters back in first quarter FY 21. Our year-over-year growth in Direct is the highest on record.
The contribution of Direct at 89% continues to rise. As we continue to prioritize our growth and investment in Direct, the strong showing has also helped us to manage the decline in DXC, the contribution of which is now at 9% of revenue. DXC revenue declined 18.1% quarter-over-quarter and 48.7% year-over-year in constant currency. This is in line with our commentary of DXC dropping to mid to high single digits as a percentage of revenue by end of FY 22. We continue to add clients in the significant revenue buckets. In this quarter, we added two clients in the U.S. $100 million-plus category and U.S. $50 million-plus category each, to take the count of $100 million and $50 million clients to four and seven respectively. Geography-wise, all our markets fared well. Our core market, the U.S., grew 27.8%.
Direct in Europe has grown 35.5% year-over-year in U.S. dollar terms. Our pipeline in Europe is strong, especially with new clients. We expect this region to continue to be a growth driver for FY 2022 and beyond. Specifically, I would like to call out our sustained industry-leading growth performance in Direct. Market share gains with our top 10 clients and beyond have helped drive growth here. Contribution from our key clients has been consistently rising, reflecting increasing depth of key relationships and share gains. While our top 10 clients have collectively grown double digits year-over-year on a consistent basis, what is equally heartening is the growth picking up beyond the top 10 clients, a theme that we will return to in a bit. We believe that our broad-based success with clients positions us well for industry-leading growth in Direct for FY 2022.
On top of our industry-leading Direct growth in FY 21, in line with our FY 22 guidance articulated last quarter. Our growth this quarter in Direct was broad-based across most verticals. Our largest vertical, Banking and Capital Markets, has grown 23.7% year-over-year in constant currency for the quarter, representing the fourth straight quarter of 20%+ growth. Our Direct BCM grew 11% quarter-over-quarter and 29.3% year-over-year in US dollar terms. On a year-over-year basis, we believe this is best-in-class growth in that industry segment and was broad-based across sub-segments of BCM. We continue to enjoy share gains with our key clients in BCM.
This quarter also saw robust sequential growth in ITCE and logistic and transportation verticals within Direct, with ITCE growing at 16.4% sequentially and 168% year-over-year off a low base, and logistic transportation growing at 14.4% sequentially and 27.7% year-over-year in constant currency. Our client stats reflect the strengthening position with several top clients post vendor consolidation. We continue to believe that our market share gains emanate from our competency-driven positioning. As our top clients prioritize and execute their spending plans, our preferred partner status places us well to capture additional market share. Notably, we are also seeing stronger growth from the lower half of our top 10 clients, as well as growth beyond our top 10 clients. Our top 5 and top 10 clients have grown consistently, registering 17% and 24% growth respectively in 1Q on a trailing 12-month basis.
The average contribution of our top five clients exceeds $110 million on a trailing 12-month basis as well. Our top four clients are now $100 million plus on a trailing 12-month basis, and all our top five clients are US dollar $75 million plus, which we believe is unique for a company of our size. Top clients number six to ten have grown at 56% on a trailing 12-month basis. This is much higher than average growth of six to ten, indicates strong growth diversification among our key clients. Our clients in the 11-20 bucket have grown at 19% on a trailing 12-month basis as well. With 24% growth for the overall Direct business on a TTM basis. Notably, all of our seven US dollar $50 million plus clients grew sequentially. In a nutshell, our strong client performance across the board supports our industry-leading growth in Direct.
We recorded a TCV of $505 million in first quarter, an all-time high for Mphasis. This quarter's TCV includes an $250 million deal that we signed in this quarter and announced in our last earnings call. This marks the sixth straight quarter of $1 million plus net new TCV that is not including renewable deals. Our TCV on a trailing 12-month basis is up 62% year-over-year. We believe that our firmly rising TCV trend is a testament to our improving track record in the scale and consistency of large deals. Specifically, I would like to make two points about our TCV composition that continues to shape our deals on an ongoing basis. There's an increasing component of large and longer tenure deals. These deals are transformation-led, integrated, and leverage our multiple deal archetypes and tribes in combination.
Secondly, there is a heavy news and services portion in our net new TCV, thanks to the tribes, with a contribution of 85% of first quarter deals in news and areas. As we report our TCV on net new basis excluding renewals, we find the correlation between our TCV and revenue growth to be fairly high, exceeding 0.9 in this quarter. Coming to our client metrics, our track record of migrating clients from one revenue bucket to the next continues to be healthy. Specifically, our conversion ratio of clients in one revenue tier to the next is solid and improving. Specifically, half of our $10 million plus clients are $20-plus million clients, and over three quarters of our clients in the $20-plus million category are $50 million plus, and 60% of our $50 million plus clients are $100 million plus clients. These stats have continued to improve.
We win two large deals on an average every quarter, marked by increasing deal sizes. As the slide indicates, the average deal size on an NTM basis is $96 million, three times of what it was two years ago. As I mentioned, our large deals are increasingly multi-tower, transformation-based, and longer tenure. The growing size reflects this capability evolution. Our margin philosophy affords us the flexibility to manage our profitability in an environment of rising cost of talent in a heated market. In this quarter, we were able to absorb higher cost of revenue and unexpected COVID-related expenses by modulating our discretionary spend on the SG&A side, and thus operated in the stated margin range. We've hired 1,981 employees in the first quarter, FY 2022, which represents a 7% addition to our workforce.
Our utilization rate reflects our capacity build-up, including trainees, and we expect to deploy our bench in the second quarter while continuing to aggressively hire to service new demand. Our EBIT margin for the quarter at 15.9% are in line with our stated operating margin band of 15.5%-17%. Our EPS for the quarter at 18.16 grew 23.1% year-over-year. We had a one-time COVID impact of about 30 basis points. Our EPS growth exceeds our operating profit growth, which in turn exceeds our revenue growth, which we believe indicates operating leverage in our model. Our cash generation stood at $48 million in Q1, represents the fifth consecutive quarter of $40 million plus cash generation, and the highest absolute level in the past 19 quarters. Our operating cash flow as a % of EBITDA continues to rise and exceeds our profit.
Our closing cash balance of $462 million is highest since the first quarter of FY 2017. Several ingredients go into combination of our success mantra that powers our robust performance in Direct. Namely, our personalized customer engagement model with key clients, with sales, client partner, delivery leaders for the account, and dedicated account CTOs. Customers are center of our GTM and resource allocation, which allows for a high degree of account-specific innovation. Second, our ability to build ever-growing pipeline on the back of our effective price and squads model, which gives us future visibility. 85% of our TCV wins are tribe-led. Supporting our tribes model with a smart surround and reinforce strategy that characterizes Mphasis' innovation DNA, including client-dedicated CTOs and consulting-oriented technology advisory group, programmatic innovation with our Sparkle program, focused research and IP innovation through our NEXT Labs group.
Our capacity to pitch large integrated deals using our proven transformation models, such as front-to-back and zero-cost transformation, which we have discussed in the past with you. The $250 million engagement that we've announced is a good example of this. Finally, the scaling up of the digital competencies of our talent with our well-established key learning resource platform, TalentNext. This has seen rapid adoption since its inception three years ago. It provides Mphasis the skill muscle to enable execution on next-gen positioning with an approach to a T-shaped talent, blending domain and technology competencies for next-gen skills. All of the above, together, constitute our business operating model designed for differentiation, repeatability, and scalability. This model enables us to win more proactively with higher win rates. Over 80% of TCV deal wins are proactively shaped.
We are pleased to note that given the strong demand for our services and strengthening position across our client base, we also see pricing leverage in our business. To that end, we have actioned a value-based pricing program and are seeing early success in some parts of the portfolio. We expect this to be able to help mitigate some supply-side challenges and provide currency for further investments with our clients. To sum up, I leave you with three points. one, we are off to a good start in FY 22. Direct growth 32.5% year-over-year in constant currency will continue to be supported by robust TCV that we've added across verticals. Direct performance will also help us mitigate declines in DXC, the contribution of which is now reduced to 9% of revenue in the first quarter. Two, all our KPIs are moving in the right direction.
Namely, our record of winning large deals is consistently improving with $100 million, $200 million, and $250 million deals in less than a year. The nature of our deals is increasingly transformation-led and long tenure-based. Our TCV, at an all-time high of half a billion dollars, is up 62% on a trailing 12-month basis. Our growth is getting broad-based with Europe, high-tech, logistics, and transportation aiding growth in addition to the anchor verticals of BCM and anchors other fields in the U.S. We continue to drive market share gains with our key clients. Finally, our client mining metrics across revenue buckets continues to strengthen. As referenced, our average top 5 client contribution tops $110 million, and our top 6-10 clients are now growing well above our Direct revenue growth with 57% HCM growth.
We've added to our count of $50 million and $100 million clients, with four clients in the $100 million+ and seven in the $50 million+ bucket. We believe this is unique for a company of our size. 3, investing for growth by using operating leverage and operating a steady target operating margin band. We believe our margin stance ensures stability in an environment of supply headwinds. The revenue growth translates into sustainable EPS impact growth and consistently rising free cash flow generation complemented by improving DSO. Our strong start to the year reinforces our confidence in reiterating our guidance for the industry-leading growth in Direct on top of industry-leading performance in FY 21. We retain our stated operating margin band of 15.5%-17%.
Our margin stance enables us to make the needed investments to sustain our industry-leading Direct growth while also absorbing rising costs associated with supply side. We expect continued growth from our key clients as vendor consolidation gains continue to accrue in a healthy spend environment. It's the increasingly diversified nature of our client base and their metrics that are foundation of our growth. On that note, I request the operator to open the line for questions, please.
Thank you. Ladies and gentlemen we would now begin with the question and answer section, anyone wishing to ask a question may please press star and one on your touch tone telephone. If you wish to remove yourself from the question queue you may press star and two. Participants are requested to use handset for asking a question. Ladies and gentlemen we would wait for a moment while the question queue assembles.
The first question is from the line of Mukul Garg from Motilal Oswal. Please go ahead.
Yeah, thanks. First of all, congratulations. Excellent quarter in terms of growth. The first question obviously is on the kind of growth you are delivering currently. I think this probably will be one of the strongest growth ever in your history. If you can just give us some sense of how sustainable is this? Was there any one-off which was there? Combined with the deal win number, what's your perception of the market right now versus maybe a quarter back? Are you seeing an acceleration in the overall deal environment or it was robust and it remains so?
Great question, Mukul. I think there are three or four questions in your question. Let me address them one by one. Firstly, I think as I mentioned in my opening remarks, the spend environment is actually fairly tailwinded. I think a number of the trends that got accelerated thanks to this, despite the unfortunate human cost of the crisis, are basically forcing enterprises to accelerate a lot of their longer-term spend plans into a crunch timeframe. I think the basic structural pivot in enterprise tech consumption really is very simply the massive migration from spending money in a CapEx-driven, on-prem, data center-centric model to consuming almost all tech as a service. That gives them the agility and the customer centricity that is needed to compete in the market today. This is not an overnight shift. This is not a one, two-quarter phenomenon.
This was something that started in the 2012, '13, '14 timeframe. Slowly was picking up speed and got massively accelerated by the crisis. We still believe this is a three to five-year journey for most enterprises, at the very least, because of the complexity required in actually making that pivot and changing that model. It is a technological change. It is a skill set issue. It is a culture issue. I think in many of our conversations, clients are calling it a tech investing super cycle that will last at least a few years. Of course, our growth has been very broad-based. I mentioned that across client segments, across industries. It is not led by one client expansion. It is not led by one deal conversion.
It is actually fairly broad-based because the fact all of our 50 million+ clients have grown sequentially and all of our verticals have seen solid growth on a year-over-year basis is really a culmination of all the work that we've done and the fact that we've actually had a pretty strong TCV wins for five quarters in a row now. I think to me, we are in the midst of a pretty strong tech investment cycle. The challenge for us will be to keep up with those demands, to keep up with sets, and to also continue to look around the corners because a lot of the tech is actually evolving very rapidly. Not only the consumption has evolved rapidly, the change is also evolving very rapidly. Ability to just look ahead and making those investments.
What looked like a three, four year runway is probably a two quarter runway to invest, and hence we have to be very nimble in those investment decisions as well. Hopefully that gives you some color.
No, sure. Thanks. I know that DXC is becoming a smaller part of your business, so this is kind of a repeated question. Any update on the resolution with DXC given the stage where you are in the MRC?
I said that the last time also. I think we've given you some guidance on where we think we will stabilize. At this point, it's a little bit premature to talk about the next steps publicly. As we have more updates, we will provide them as we go forward.
Fair enough. I'll get back into the queue. Thanks for taking my question and best of luck for rest of the year.
Thank you.
Thank you. The next question is from the line of Manik Taneja from JM Financial. Please go ahead.
Hi. Thank you for the opportunity and congratulations for a very solid performance this quarter. Just want to get some sense on a couple of things. We've seen our onshore proportion of revenues increase in the current quarter. This is contrary to the trend that we've seen across the years. Is this led by some of the new deals ramp-ups, and do we expect this to reverse? That's question number one. The second question was with regards to your comments on pricing. You suggested that you were seeing some pricing leverage in the market. Wanted to get more insights on the overall pricing environment and do you think that helps negate some of the supply-side pressures? Thanks.
Sure. I understood your second question. I'm a little bit unclear as to what the question was on the first part. Let me address the pricing issue, and then maybe you can summarize your first question for me again. I think what I mentioned on the pricing side was that as you go up the value chain, as we engage really our ability to drive value-based pricing and move away from pure, simple cost-plus models. As well as actually work closely with customers in ensuring that they're able to see the value we bring and the environment we are operating in, and hence give us the ability to do right pricing. I think that is a program that we are very collaboratively working on with our engagement teams as well as with our clients.
We definitely expect that to release some of the supply constraints driven margin pressures. Of course, the intention for us is to make sure that we are able to balance growth needs, investment needs, and operate in the band that we shape it. We definitely think that is a lever we can use to continue to invest in the business. I think on your first question, you asked us whether the growth acceleration was due to one large deal or something broader. Am I right?
Nitin, basically the question was with regards to the increase in on-site component of revenues in the current quarter. Just wanted to understand, is this led by some of the large deal ramp-ups?
No, I understood. I think headcount addition is a leading indicator for revenue. Definitely some of the larger deals require us to ramp up on-site first. We obviously find ways to continue to stabilize as we sometimes transition and sometimes stabilize the program. If you look at fourth quarter, we had a pretty strong headcount addition on-site. That's obviously converted to revenue this quarter because that's the way the cycle works. If you look at the current quarter, we've actually had stronger headcount addition offshore. Some of that will actually normalize as we go forward. I think the long trend doesn't look like it's going to change dramatically. We will probably have a bias towards growth offshore.
At the same time, we'll obviously continue to proportionately add people in whichever geography we talk about based on where we need the talent or where we need to deliver the work. Also keep in mind, we've also added newer geographies outside India. Some of that also may be playing up in the revenue numbers, and we can give you some more color on that as well as we go forward.
Sure. Thank you. All the best for the future.
Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Yeah. Hi, good morning, everyone, and congratulations on a great quarter. My questions are on margins. This quarter, we have seen gross margins fall off quite a bit, and we have dialed back on S&M and G&A. I just wanted your sense on how much of this gross margins is recoverable going forward. We don't report attrition, but it's very clear that from an industry perspective, it's going up quite a bit. In that context, in terms of gross margin recoverability and your ability to continue to invest in S&M, I just wanted your thoughts on that.
Nitin, I'll give you a quick response and maybe Manish can add some more color to it. Broadly speaking, the impact on gross margin is explainable by two or three factors. Firstly, if you look at just the COVID impact, we called out about 30 basis or so as a one-time impact. We had utilization that dropped because we ramped up. There is obviously a lag time between hiring, deployment, and billability or ability to convert the employees from a revenue standpoint. That obviously has an impact on the margin as well. There is some element of this onshore versus offshore based on just the phase of the ramp-up. Of course, there is some element of the ability to attract talent, and I think you referenced attrition and cost of labor. Clearly, we are going through those as well.
I think the key thing to note is that we talked about over the last three or four quarters, the fact that we will prioritize growth with a margin band that we want to operate in. There are certain discretionary spends that are non-manpower related, even though they sit in our SG&A expense line. I think we were able to manage those to make sure that we stay in the EBIT operating band ratio. Combine the factors that I talked about from the standpoint of some pricing leverage, some normalization in the onsite offshore mix given the onboarding trends of the first quarter. Of course, our ability to continue to operate the supply chain so we keep our margin steady are the things that we'll focus on as we go forward. I don't know, Manish, if you want to add anything to that.
I think, Nitin, you covered all the points. I would just like to give one color to it, which is the short term and the long term. To your point, Nitin Padmanabhan, I mean, there are a few costs which have come in as a one-time, whether it is the COVID expense or the investment for growth reflected in lower utilization. Those are recoverable in the short run. When we look at some of the longer-term investments, those investments very probably have matching from our pricing conversation. I guess to your point, gross margins are certainly recoverable, some in short term, some in long term. While that happens, the profitability can be maintained in that range that we have talked about very clearly.
The primary levers are the discretionary spends, which we can kind of control, and that's what we have demonstrated in this quarter as well.
Sure. That's helpful. Just one more from my side. The unbilled revenue has gone up quite a bit this quarter. Just some color, if you could give there, what's driving that and when do you expect normalization?
Yeah, sure. As you know that once the month gets over, the invoicing happens after the month. When you are in an accelerating mode, your subsequent month revenues are typically much higher than the previous month. If you look at the last month revenue of previous quarter versus last month revenue of this quarter, that's a delta significantly larger than the incremental unbilled. Just to give you some quantification, the actual increase in unbilled is about $13 million, while the quarter's end month-end revenues are actually higher by about $17 million. From an AR perspective, 95% of this is within the payment contracted terms. I would say that this unbilled is just a reflection of the scale of growth and as the period goes, we will bill them, and it will move to the billed category.
Overall, on a DSO basis, if you look at it, unbilled happens to be 35 days out of the 61 days of DSO, which is pretty much in line with what we have seen in the past as well.
Sure. That's very helpful. Thank you so much. All the very best.
Thank you.
Thank you. We'll move on to the next question. That is on the line of Sandeep Shah from Equirus Securities. Please go ahead.
Yeah. Thanks for the opportunity, and congrats on a very great execution, great on revenue and margin. Nitin, it's good to hear about the pricing comment as a whole. Just wanted to understand, is it becoming a pricing uptick from most of your strategic accounts or w anted to understand that, because at one end in the industry, there is a traditional portfolio where pricing pressure continues. At the other end, there is a new generation portfolio where pricing increase can be possible. How these buckets looks like for the Mphasis and what confidence drives us that even despite some legacy portfolio, we are confident to bring the pricing up going forward. Some color will help as a whole.
I think you actually answered your own question. Pricing leverage is a function of what part of the value chain you're operating in. I think I called out some four or five key trends at the beginning of my presentation. Those are areas where it is possible for us to look at value-based pricing. It is also possible for us to construct some transformation themes like zero cost, where we can actually bundle the run business in a managed outcome construct, apply extreme automation, and then find the savings to deploy back into the change and the transformation programs. Those are going to be fairly popular with at least a number of our engagements, where we are able to help the client find the money to apply into transformation, and hence increase the size and scope of what we do.
I think on a pure run the business or legacy portfolio basis, you're right, there is pressure on those costs because that's a leaking bucket and will continue to actually be as a leaking portion of tech spend, as the spend migrates to this new mode of consuming everything on demand. I think a blend. On an overall basis, we do believe that we have the ability to continue to improve our pricing leverage. Of course, as I mentioned, we are working very closely with our engagement teams and our clients in making sure that we're able to right-price all our engagements.
Okay. Thanks. Just on deal pipeline, with a great closure of larger deal size, can you throw some light whether such larger deal size or mega deals are still in the pipeline, or pipeline now has a more mix of small to medium size? Second, on BPO this time also, the revenue growth has been robust. Is this driven through digital or is it outside digital risk which has driven the growth in BPO?
[Sandeep], I think first question, we've said in the last three or four quarters that our pipeline continues to be robust. Which means as we've converted almost $1.6 billion into deals won, we've continued to actually add new deals to the pipeline. As always, the large deals will be lumpy, but some will be $50 million, some could be $250 million. The pipeline actually continues to be fairly robust and fairly healthy and fairly broad-based across the sizes of deals as well. Of course, we'll give you more color as we get through the next two or three quarters.
On the BPS revenue growth, I think some of it is, as I mentioned in FY 2021 third quarter, we talked about the fact that many of our deals are actually bundled, where we are able to find with operating levers to apply automation on the business process, apply the whole customer journey map, advisor workstation, and digital intervention. In a number of ways, it is led by digital transformation. I think the DR portion has been fairly stable given that most of the volumes that we saw increase happened in FY 2021. I think that portion will continue to stay stable. Broadly, the BPS growth is really driven more by transformation projects that are bundled along with many of our large deal constructs.
Okay. Thanks. Just last bookkeeping question. Manish, wanted to understand in terms of the ForEx hedge gain in the revenue line, will it be a tailwind to the margin in FY 22 as a whole versus FY 21?
At this point in time, we ended the quarter at INR 74.3 average. At least given our hedge policy of covering 100% for the next four quarters and progressively reduce percentage over the next four quarters. The forward premium that we have is higher than what we currently are experiencing. We do believe that if the exchange remains at the level at which it is, we should see some tailwind on margins at least for that four to six quarters period.
Okay. Thanks and all the best.
Thank you. The next question is from the line of Dipesh Mehta from Emkay Global. Please go ahead.
Thanks for the opportunity. Congrats on very strong distribution and very healthy deal intake from there. Two questions. First about the revenue mix. Is our revenue mix still toward more new-gen business? As you commented about value-based pricing program, do you think structurally our margin will expand over medium-term considering these two factors where your new-gen is growing and you have some ability to price it better? Second question is about can you provide some update about how the Blackstone companies as a portfolio doing for us over, let's say, last few quarters? The third thing is about the headcount addition. How we are managing our overall resource requirement, fresher versus lateral, if you can provide some color, thanks.
Dipesh, on the first one, I think I actually reiterated the philosophy when I talked about the pricing discussion. Firstly, our attempt is to maximize growth, maximize TCV wins, and more importantly, TCV conversion to revenue growth. That requires a certain investment both in capability, competency build-up, utilization, having the right talent, and all of the above. I think we will prioritize growth. The reason we want to hold the margin in the band is because there will be puts and takes that will require us every quarter to adjust up or down some of these investments. I think pricing is, at this point in time at least, we are seeing it as a hedge against some of the inflationary pressures. At this point, our expectation is to continue to operate in the margin guidance that we gave.
Of course, there will be, as I mentioned based on specific quarterly movement. For example, in Q1 we had unexpected COVID issues. I think we'll continue to operate in the guidance range that we gave, but prioritize for growth. Second question that you had was around Blackstone portfolio. I think, again, it's very much part of our Direct business. It continues to be a fairly strong contributor to pipeline growth as well as TCV conversion. By definition, of course, those are companies that are not the size and scale of some of our larger accounts. As a cluster, that is definitely very valuable to us, and we'll continue to invest and prioritize on that growth. Not only Blackstone, but all the other stakeholders that we are now working with will fit in that bucket.
We obviously made a lot of investment in creating a go-to-market approach and making sure that we have the right setup for us to service those customers. We'll continue to give you update as we have any. Hopefully, there will be some more specific updates. I think it's a little premature for us to talk about some of those at this stage. Finally, I think on the supply side, we are taking a supply chain approach. It's a blend of course, campus recruitment as well as lateral recruitment. Not to forget, the third leg of the stool continues to be our talent transformation program called Talent Next. The additional thing we've done is we've added new supply centers. If you remember, the last quarter we talked about addition of our delivery centers in Taiwan. Actually, we expanded that significantly. Mexico is a new center.
Costa Rica is a new center. Estonia is a new center. We just announced, we actually expanded in the U.K. for a specific client project outside of London in a city called Leeds. We also announced a program to actually apply talent transformation and attract the talent pool from Calgary over the next couple of years. I think all of these are supply chain initiatives as well as expansion in some markets like U.K. and Canada. All of this goes into the solving the puzzle for finding the right talent for the right job in the right market at the right price.
Understood. Thank you.
Thank you. The next question is on the line of Amit Ganatra from HDFC AMC. Please go ahead.
Hello? Hello?
Yeah, go ahead.
Yeah. I just have one question. Now DXC is a very small proportion of your overall top line. Anyways, the other business segments continue to do well. How long before you can now confidently guide that you will have industry-leading overall top-line growth and not only the Direct core growth?
Amit, I think the answer to that is that as we have any update, we'll give you. I think at this point in time, let's just stay with the fact that we expect industry-leading growth in Direct, which is now 89% of our revenue. We still expect top quartile growth in the overall company. Where we end up with FY 22, again, we have three more quarters to go. I think it's only fair given the current position that we give you outlook based on our current visibility. I think that's the best-case visibility I can give you at this point in time.
Having said that, I think, keep in mind that we have seen accelerating growth in Direct, and that has actually really helped us mitigate and in many cases, we were able to actually take dynamic calls on where we want to invest and what segments we want to grow. So it's great as we try to manage the balance of the portfolio, it's great to actually have the optionality of making sure that we're able to grow in strategically chosen areas. That's the philosophy that we'll continue to follow.
Sure. Thanks.
Thank you. The next question is from the line of Mohit Jain from Anand Rathi. Please go ahead.
Hi, Manish. Just one question on the margin trajectory for the rest of the year. Given the situation on the attrition side, are you guys planning some one-time correction of wages in one of the quarters? Do you think the margin trajectory for the year should be quite similar to what we have seen in the past years?
Given we saw the increased demand and the supply situation, and this being a year of execution, while we had an upward bias to our margin, we felt it prudent to keep it in the range of 15.5% at the bottom. We want to make sure we continue with our philosophy of investing for growth and capture the opportunity for that at this point in time. We would like to make sure that we, or rather, we believe we should be able to sustain the margins in a narrow band, and try and maximize from a growth opportunity perspective. As we talked about the investments that we made last quarter, and we managed to still deliver consistent margins by managing the discretionary spend. I would say that sustaining the margins is something that we will certainly be able to do during the year.
My specific question was, generally, first half versus second half, you had a different trend, of course, in FY 21. Before that, we used to have better margins in the second half because most of the things used to happen in the first half. From a second quarter specifically perspective, you are saying there is no specific correction that you'll see in 1 quarter or something. It will be the way it used to happen for Mphasis, spread across the year. Is that correct?
The good thing from our model perspective is the compensation increase is baked in on a quarterly basis, given the philosophy of that being linked to the GC score, which we talked about extensively in our last quarter's earnings. We don't expect a lumpy one quarter big impact because of that. At the same time, the savings that we will have on the margins, how much of that will flow into the EBIT will depend on our desire to continue to invest and plow back some of that to the SG&A expenses.
If we still get some tailwinds, and if the whole supply situation becomes better, both in terms of COVID as well as in terms of availability of talent, then it may see an upward bias. At this point in time, based on what we see, we think it will remain in a narrow range.
Understood. Second was on the M&A side. I think a few quarters back, we were talking about expanding some presence in Europe. Is there an update there on how you guys are sort of approaching this whole thing of increasing our presence in Europe?
I can take that.
Sorry, Madhav.
Yeah, I can take that, Manish. M&A is not just a Europe issue, to be honest.
Yeah.
I think it's a multi-factor matrix that we are working with. There's a competency element. I think we've talked about strengthening some of our tribes. Some of our tribes are market leading, some of them need more investment, and some of that acceleration can happen through M&A. For example, we did DevOps strengthening through Stelligent. We did data tribe strengthening through our acquisition of Datalytyx in November. We've identified a few more areas as well as prospects that we are actively looking at right now. Second element is customer acquisition driven. There are segments of verticals or clients that we don't operate in. We have a very clear identification of which segments are attractive to us, and we have that on the list as well as on the search process. Thirdly is geography.
I think if we can find something that helps us accelerate growth in a new market, we'll definitely look at it. There is really a combination of these three. If we can find something that cuts across two of the three or three out of the three, that will get prioritized, and that's the philosophy we are taking. Very actively looking, very actively diligencing businesses, and very actively continue to source new transactions.
We should expect something in FY 2022. Is that a fair.
Well, it's not done till it's done, so it's hard for me to give you a certainty on that. The intent is definitely there.
Anything on size? How big or small could it be? Any comfort range that you have while looking at these targets?
I think we talked about some indication in the last quarter. We said we are not looking to do transformational. It's not about doing a mega deal. Still the mindset is a little bit, I would say, strategic stroke tuck-in. Tuck-ins are a little bit smaller, strategic is a little bit bigger. I would say anything that is sub 10%, 15% of revenue is probably the upper limit right now.
Understood. Thank you, sir. That's all from my side, and all the best.
Thank you. The next question is from the line of Vikas Ahuja from Antique Stock Broking. Please go ahead.
Yeah, hi. Congrats on a very solid quarter. I have two questions. First, deal bookings continue to surprise positively. Just wanted to understand what has changed exactly, or what are we doing different that our bookings are much stronger than compared to our peers, especially. Secondly, on DXC, the revenue has been declining, and now last quarter you said it will end up around mid-single digits. My question is, DXC has been surprising continuously on the negative side. What gives us confidence now that it will actually end up at mid-single digits and they will not exit it completely? Thank you.
I think on the first question, I actually spent a considerable amount of time going through what works for us and what's the success formula that is actually working and giving us these larger deals and bigger TCV deals. If you go back to the earnings deck that we presented and look at the slide that talked about the four ingredients on slide 12, that's really a culmination of all the work we've done, all the deal archetypes we've constructed, early engagement with clients, consulting-led, tech advisory-led group, repeatability of our go-to-market muscle. If a deal archetype works in one customer, can we replicate it to the other? Most importantly, our mindset of being in the business of one, which means every customer gets a fairly dedicated engagement, personalized kind of mindset. That helps us contextualize, understand the client environment, and then position for maximum impact.
On your second question around DXC, of course, there are no guarantees. No customer has given any guarantee. We have to continue to work to kind of win that business. Based on our understanding of the account, the relationship, their needs, our ability to help, whether in industries or in geographies, we do believe at this point in time that we will have continuity of relationship. As and when things evolve and if things then change, we will give you the update. I think that's the best answer I can give you right now on our visibility. Of course, as I mentioned, if things change, we will update you. There are no guarantees in business. We have to earn every day.
Thank you so much.
Thank you. The next question is from the line of Nirmal Bari from Sameeksha Capital. Please go ahead.
Yeah, sure. Thank you for taking my question, and congrats on the very good set of numbers. My first question is on the logistics and transportation, the gross margin that you gave in segmental. There we have been recording significantly stronger gross margins in logistics and transportation. What is the reason for that, and is that sustainable?
I think, again, every cloud environment is different. Every industry has its own different dynamic. Competitive intensity, value pricing we talked about. Some of those things are at play here. I think this is not something new. It's historically been true as well. We do continue to believe that as long as we keep feeding growth into that segment, we'll have the ability and the leverage to continue to also generate good margins there.
Okay. The second part is on the others that we report. Is there any segment significantly big enough there that you would want to break out that segment out from it?
We made certain changes to the segment reportings. I think we still have some more work to do as we expand some of these segments. We talked about five focus areas on the NCA side. We are right now clubbing many of those in others. We will start reporting them separately as we believe we get to a point that we need to start reporting. I think at this point in time, these are good visibility areas for us to give you.
Okay. The third question is, one of the participants earlier asked this question, I would like to frame it a bit differently. On the supply side things, what we are seeing from the industry, there's so much of issue regarding attrition and wage inflation and everything. We have typically over the years been giving salary hikes over the entire duration of the year, and there's no one single quarter where this impacts. This time, are we planning to do it a bit differently? I think there would be a salary hike related to the normal upskilling as well as we would give out some one-off salary hikes in any particular quarter. Sorry. Just to retain employees.
I think that's a good question. We debate that constantly. I think as part of that periodic adjustment that we've talked about, we always have some discretion in how we want to play that, how we want to spend that, so to speak, retention pool. I think we continue to make those decisions on a pretty dynamic basis, on a judicious basis. I think I have a little bit of a different approach and view to this demand-supply dynamic. I think we are, as an industry, we are in the business of creating net new skills. We exist because clients expect us to bring skills to them. They expect us to bring a lot more than skills today. At the very heart, we have to continue to find ways to create new supply chains.
I think I talked a little bit about how we've expanded that across locations, across geographies, across tiers, across experience levels, and across cities. I think we will just continue to do that. Whatever it takes in the interim to keep customer service delivery at the heart of everything we do and make sure that we are able to retain, retrain, and onboard new talent. I think all of those are part of the equation.
Okay, thanks. The final question is if you can please repeat the 11-20 customers growth in the current quarter sequentially as well as year-on-year. I missed that number earlier.
Sure. I think the 11 to 20 number is 19%.
Year-on-year?
Yes. Not last trailing 12 months.
Okay. Got you. Okay, thank you.
Thank you. The next question is on the line of Ashwin Mehta from Ambit Capital. Please go ahead.
Hi. Thanks for the opportunity and congrats on good set of numbers. Nitin, one question in terms of we've done pretty well in the top 10 accounts. Now we are seeing a broadening of that growth with, say, 19% growth in your top 11-20. If you can just give some idea on the next set of clients, their profile in terms of size, scale, as well as potential to drive continued improvement in terms of deal flow going forward.
Absolutely, Ashwin. I think the profile of customers is actually not that different. If you recall, most of our clients, I talked about the fact that we now have top 10 U.S. banks by assets as customers. We had five of them three years ago. Those will obviously not be sitting in top 10 already. That's a good example of what potential exists outside of top 10. I think by definition, we are obviously a little bit more tilted towards the Fortune 100, 200, 500 client segment anyways. That's where I think the opportunity is really immense. We have the playbook. We understand what it takes to create that being in the business of one mindset. We operate with a very high client-centricity mindset.
We invest in engagement and understanding of the client priorities, and we take the best of Mphasis through our tribes and engagement teams in there. I'm actually very excited that we have a tremendous group of customers outside of the top 10 potentially, not just the top next 10, but the next 25 to 30, that actually can definitely be target potential areas for us to bring into the client metric that we've talked about. The reason we now have four clients over $ 100 million, seven clients over $ 50 million, and the fact that we've improved every segment or metric is really the playbook that we will just continue to apply at scale. That's really what I think we are very focused on from an execution standpoint.
Fair. Thanks. Just one more in terms of, say, do you see an exercise of that MRC shortfall related penalty clause in DXC near term? Could that be a one-time benefit for us in terms of margins near term? We would still think about smoothening the decline here instead of going in for that penalty?
Yeah, at this point, I would refrain from making any comments or confirmations because we want to just make sure that we have all the optionality we need as we think about those things. We'll give you an update as we go through the next couple of quarters.
Okay. Thanks, Nitin. All the best.
Thank you.
Thank you. The next question is on the line of Ashok from SUD Life. Please go ahead. Ashok, your line is on the talk mode. Please go ahead. There's no response from the current participant, we'll move on to the next. That is on the line of Rishi Jhunjhunwala from IIFL. Please go ahead.
Yeah. Thanks for the opportunity. Just one question. Given that we are seeing a pretty sharp decline in DHC for the past four, five quarters, I just wanted to understand a bit in terms of how do we manage the supply side there or the headcounts, right? If you really look at that, DHC is largely a non-DXC portfolio. Just wanted to understand the fungibility. Does that help? How do we manage supply there? Does that have any bearing on margins in the near term?
Absolutely, Rishi. Great question. I think there are two ways to think about it. There is some potential for us to redeploy. There is extremely high complexity in matching those ramp downs with ramp ups. In many cases, we actually have to run them through the TalentNext program with that visibility in mind. I think it's a complex equation that we have to manage that definitely has a bearing on many of the metrics that you see in the MD&A. For example, you will see decline in ITO business, you will see decline in some elements of our verticals. Some places we do have fungibility. In some cases, we use that as best as we can. I think for our first effort is to make sure that we are able to run them through our reskilling programs and absorb them.
That's one of the reasons why you will see on a net addition basis, while the numbers are going up, we are still able to actually reuse and redeploy some of those people. To your question around margin impact, yes, that has some impact on holding cost or utilization because it's impossible to match it on a day-to-day basis. That's something that we've made part of our management metrics, and we have to continue to focus on those on a daily basis.
Great. Secondly, on the deal wins, given that the quantum has increased substantially, can you give some color on how the average tenure has moved over the past one year? Also, if the large landmark deal that we had won has already started giving revenues in 1Q? Thank you.
Rishi, I think the average tenure, we haven't put that number out publicly. We obviously are tracking it internally. If you look at the metric of the $96 million average deal size, that obviously is also impacted by the fact that the large deal was actually a 10-year deal. That's probably the longest deal we've actually signed in the history of the company. On an average basis, our duration actually definitely has moved, I would say, closer to the two to three-year mark. There's always a blend. There are some deals that are more shorter term, less than a year, depending on the type of work we do. There are many that go in the three, four, five-year category.
I think it's a very good, I would say, reset and capability reflection that we're able to actually do larger, more transformational deals that run longer as well.
If I can just add to that, Rishi, Manish. While there is an increase in the number of large deals and the size of large deals, and we are winning significant amount of TCV, the tenure is not increasing very significantly, is also reflected in the fact that when you see the correlation coefficient, which we have been reporting, that has actually shown an improvement trend in terms of year-on-year. Which means we are converting the TCV to revenue in a better manner than what we were doing before.
Yeah. I think the only other question that you asked, Rishi, is the large deal conversion. I think we talked about the fact that we're going to be in transition in the current quarter, and we expect that to start converting to revenue Q3 onwards.
Thank you so much. All the best.
Thank you. The next question is on the line of Sulabh Govila from Morgan Stanley. Please go ahead.
Yeah. Hi. Thanks for the opportunity. I just had one question. On your top 10 client base where we've seen a significant growth this quarter, Nitin, you touched upon client mining and market share gains, particularly in the strategic accounts that we've seen there. Just wanted to understand where we are in that journey of these vendor consolidation exercises and how much do you think is played out already in the numbers there?
I think the fact that we're able to grow all of our top accounts over $50 million, they're actually top 7 accounts, so to speak. The fact that we are still seeing 6 to 10 grow dramatically faster than 1 to 5 or even 1 to 10 is reflective of the fact that we are on the right side of the consolidation, especially in our strategic accounts. Secondly, I think, as I mentioned earlier, we definitely feel there is runway ahead from this investment cycle that we are seeing in tech. It's not a short-term phenomenon. As long as we have the right set of competencies and we make sure that we continue to invest in those, I think there is a runway ahead for us to continue to gain wallet share in those accounts.
Of course, we are very focused on the rest of the pyramid as well as the top 5 and the top 10, as I just mentioned, because I think that's where we are seeing these accounts actually become another 20 to 50 to 75 to 100 million accounts in that sequence as we progress them through the conversion. If you remember, I actually talked about conversion rates because that's something we measure very closely.
Sure. Thank you. That's very helpful.
Thank you. The next question is on the line of Ashok from SUD Life. Please go ahead.
Yeah. Hi, this is Ashok from SUD Life. Thanks for giving me the opportunity and congrats for the good, consistent numbers on the Direct side. I have one question on the DXC front. I just want to dig slightly deeper on the revenue leakage here. Let's say in terms of what type of work has been getting transferred or is it a lower margin business for you and it is being transferred to any other, let's say, Indian vendors or DXC being in sourcing it. Any color on that front will be helpful.
At least to our knowledge, we don't think this is a wallet share issue. I think, for us, what we are doing really is continuing to focus on where we think there's opportunity for us. I think the life cycle of those businesses is different. We'll continue to, as I mentioned earlier, focus on where we think there is best use of our growth investment and dollars. The relationship continues to be good. We know there is opportunity, we'll continue to focus on where we think there is best, as I said, use of our strategic focus.
Okay. That was helpful. That's it from my side. Thank you.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Nitin Rakesh for his closing comments.
Thank you, operator. I think, again, we've had a great start to FY 2022. Thank you all for your questions, your patience, your interest and your coverage of the company. We look forward to staying consistent with our performance, and continue to keep our clients and our employees at the heart of everything we do. Thank you very much. Stay safe, and we'll talk to you next quarter.
Thank you. Ladies and gentlemen, on behalf of Mphasis Limited, that concludes this conference call. Thank you for joining us. You may now disconnect your lines. Thank you.