Ladies and gentlemen, good day and welcome to IKS Health Q1 FY 2026 earnings conference call hosted by ICICI Securities. 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. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Ruchi Mukhija from ICICI Securities. Thank you, and over to you, ma'am.
Good morning, ladies and gentlemen. Thank you for joining us today on Q1 FY 2026 earnings call of IKS Health. On behalf of ICICI Securities, I would like to thank the management of IKS Health for giving us the opportunity to host this earnings call. Today, we have with us Mr. Sachin Gupta, Founder and CEO, Ms. Nithya Balas ubramanian CFO, and Mr. Saransh Mundra, AVP Investor Relations. I'll turn it over to Saransh for the safe harbor statement and to take the proceedings forward. Thank you, and over to you, Saransh.
Thank you, Ruchi. Welcome, everyone. Thanks for joining the call early in the morning. We'll start with the disclaimers, and I'll hand it over to Sachin. As part of our prepared remarks, we may make certain statements that are forward-looking and may involve uncertainty. We don't take any responsibility to update those statements, and your discretion is warranted while making any investment decisions. Over to you, Sachin.
Great. Thank you, Saransh. Thank you, Ruchi. Just a minor correction: Nithya Balas ubramanian, not Subramaniam. But anyway, good morning, everyone, and welcome to our earnings call for the first quarter of fiscal 2026. This is our third earnings call since we went public in December last year. So excited to talk to everybody again. On the call today, I'll do probably three things. One, just because there are always some participants that are relatively new, I'll start off with giving a very quick high-level overview of the business. Talk specifically about our execution this past quarter as it relates to those five strategic vectors along which we want to measure our progress, and along which I think our discourse is most relevant, because I think those vectors drive the financial outcomes that all of us are interested in.
Then, of course, we'll dive into. I'll provide some high-level commentary on our financial performance for the fiscal Q1, after which I'll turn it over to Nithya to talk through some of the details, and then we will open it up for questions. But before I dive into the high-level overview, let me kick the call off. Obviously, all of you have seen the release that came out last night. Hopefully, you studied the numbers. One of the things that I think some of you saw in the release that perhaps might have caused some confusion, and I want to just clarify it upfront, was the change in director status in the Indian mothership. I just want to clarify there's nothing really that's changing fundamentally.
This is barely a technical change associated with the fact that I live in the U.S., and hence my employment pretty much needs to reflect with the U.S. entity, and as a result of which I can't really be employed by the Indian mothership, and so as a result of that, I'm no longer a full-time director, and because the company obviously needs a full-time director, Nithya is being made the full-time director. I continue to be the Group Global CEO and continue to be at the helm and at your service for as long as you guys desire, so just wanted to clarify that upfront because it felt like it was causing concerns or ripples. We can certainly take any other questions around this when we get to the questions. Okay, now to just jump into the business. Obviously, you've seen the numbers, a solid quarter of performance.
But before I go into the quarter, just a quick high-level recap of the business model. So we are perhaps the most comprehensive Care Enablement Platform that delegates chore tasks from large physician groups in the U.S. so that they can focus on their core of patient care and patient experience. We do so in a manner where we have built proprietary technology to eliminate as much of these tasks as possible. And because technology often doesn't entirely eliminate the task, our technology is coupled with our global human capital, which becomes a very important human in the loop, also from a safety perspective, to deliver these tasks. We do so in a manner where not only is it clinically transformative for the patient experience and the quality of care, but also it's financially transformative for the practice, which, as you know, U.S. healthcare is under tremendous financial stress.
And so through these 16 odd tasks or actions that we delegate for these physician groups in the U.S., we are often able to, at the full manifest of the platform, deliver between 800 to 1,000 basis points of additional economic value for them after paying for the platform. So it's financially transformative in addition to being clinically accretive for them as well. We have, over the last 18 years, grown our business to about 150,000 clinicians across the U.S. Remember, there's about 900 odd thousand in total. So about 150,000 clinicians in the U.S. use some manifest of our platform or the other. And those 150,000 are spread across now about 650 organizations that these physicians are a part of, right? So 150,000 physicians, 650 odd organizations. Remember, this number was close to 800 in October of 2023 when we completed the AQuity acquisition.
We have then said that our strategic business model is always to have the consolidators as our clients, which are the large groups that are buying the other groups. And so with AQuity, we got a lot of good stuff, but one of the things we got was a long tail of small physician groups. And strategically, intentionally, we are continuing to prune that tail. We are now down from a combined customer base of 800+ in October 2023 to about 650. And as I've stated in the past, a sort of steady state will probably end up closer to 500. So that's just one thing to keep in mind: 650+ customers, 150,000 providers.
Our business model, because of its unique nature, by which we actually delegate all of these tasks that are chores but are very important for the sustenance of their practice, is by that very nature, the business model becomes annuity also. So 95% of our revenue is repeat revenue from the same customers. And in addition to that, it becomes really, really sticky. So it's a very sticky annuity business model. And the human element of what we do now comprises of about 12,368 FTEs across the U.S. and India. Again, remember, this number in Q1 of FY 2025 was actually 13,277. So on a year-on-year basis, our global headcount is down about 7%, which is, again, something that we will talk a little bit more about when we discuss our strategic vectors of execution.
Obviously, because we are very intentional about working with consolidators, our top 10 and top five clients drive a large part of our revenue and our growth. That is very intentional. The good news is that our top 10 and top five clients have great vintages and are actually growing. So that always is a good sign of the progress in the business. Also, as you probably already know, we operate in a very large TAM. Our TAM traditionally was about $225 billion-odd just in the physician market in the U.S. Starting about a couple of quarters ago, as I've mentioned, we have also pivoted our business model based on the pull that we saw in the market into the acute or hospital RCM space.
That has expanded the TAM to north of $260 billion, of which really only about $34 billion-$35 billion have been delegated. It's still largely, ordinarily, an insourced market. Yet, I think that the pressures that the U.S. healthcare system is facing, cost, quality, access, it's becoming imminent that this TAM, the outsourced TAM of $34 billion -$35 billion, is actually going to grow faster than the overall market. The market's growing at 8%, but the outsourced market is growing at 12%. This is important again because I keep saying if they're growing faster than 12% on a constant currency basis, we are gaining market share. If they're growing slower than 12%, we're losing market share. That's an important indicator and something to always watch out for.
Now, if that 12% further accelerates because of the pressure in U.S. healthcare, we'll certainly keep you updated, and that should also reflect in our growth. And our idea, obviously, is to grow significantly faster than the outsourced TAM over a period of time. One of the other dynamics that it creates, because there's such a large TAM, which also then leads to our competitive positioning is that because these 16-odd tasks, because these 16-odd tasks have a TAM of about $260 billion, the reality is that the TAMs of several of these tasks individually is quite large, right? For example, clinical documentation, which is reflected in our Scribble product, could be a $30 billion TAM. The core 5 features that comprise ambulatory RCM is a $40 billion TAM.
And so as a result, there are several genres of competition that we have to deal with. One of those is actually what I call these point solution companies that are focused on one or two or five of these 16 tasks, because the relative TAMs of each of these tasks itself is so large that you can build a very large company just focused on them. Now, our thesis always was that as the market matures and buying behavior matures, buyers will realize that they can't be in the business of buying many point solutions and integrating and carrying the burden of managing tens of vendors across these point solutions. And so over a period of time, they realize that the value of the whole is much greater than the sum of the individual parts, and that is a better strategy.
And we see that the buying behavior will slowly but surely migrate towards the platform buying behavior. And so what that means is, and we've set our competitive advantage to that, which is we're the only company that has the full breadth of the platform for those buyers that are willing to buy the platform thesis today. But because there are several buyers, especially in the large health system market, that are still interested in a point solution best-of-breed approach, the reality is for those, we still need to be one of the top two or three vendor partners in each of these point solutions. And that creates a very important strategic predicament for me, where we have to execute as a leading point solution vendor across 16 point solutions, even as we are perhaps one of the very few companies that are building out the entire platform.
That really continues to be our competitive positioning. With that, let's just quickly touch upon the five strategic vectors of execution that we are consistently focused on that, again, I think should shape the discourse that we should have on a continued basis unless something changes, in which case I will let you know. The first of the five is the fact that we are moving rapidly to this AI-native agentic platform manifest for doing all these tasks. Happy to report that there's been a lot of progress on this strategic vector over this last couple of quarters, but specifically last quarter. We launched Scribble Now, which is our fully ambient autonomous clinical documentation solution.
With that, I think IKS now has the most comprehensive set of variants that meet physicians wherever they are in their journey of choosing the right clinical documentation solution for their needs. We are also in the process of actually launching a very unique multivariant Scribble option, which will allow each physician user to choose different variants of Scribble for different types of visits. There'll be some easy patient visits where the fully autonomous ambient listening solution without supervision from the human produced instantly on a synchronous basis is best for them. There'll be other situations where there'll be more complex encounters where there is a need for more comprehensive documentation, where the human in the loop or the clinician in the loop becomes very relevant.
And the ability to pick and choose different variants of clinical documentation solutions for various parts of their patient panels, we suspect could be a very exciting differentiator over a period of time, just based on the utilization trends that we've seen across the country from ambient autonomous-only AI-driven solutions, where a lot of doctors perhaps have bought them, but their utilization of those solutions as a percentage of their overall visits is sort of still in the 50% and 60% odd out there. So I think that should be very exciting. Also, happy to report that we've actually been able to build out our autonomous medical coding technology, again, obviously GenAI-led, for two medical specialties, which we now continue to optimize. And now, of course, we are expanding to several other medical specialties.
Again, remember, just like clinical documentation, there are companies out there that all they do is medical coding. So this is to my point of wanting to be number one or two or three in each of the point solutions, even as we are trying to build the full platform out. And then, of course, we've done significant progress in the denial prediction and prevention space using our AI technologies that we built. And we've also launched an AI-led patient engagement hub that actually drives behavioral economic inputs-driven patient engagement to help shape various aspects of patient behavior, including reducing no-shows for visits that help improve access to care, including nudging patients differentially around adoption of our adherence to various clinical protocols, etc.
So significant progress in dramatically moving from sort of that human-led tech in the loop to not only tech-led human in the loop, but with AI now moving towards a fully autonomous set of features which don't need the human in the loop at all over a period of time. That's the first vector of our execution this quarter. The second one is obviously the big AQuity acquisition that we did in October 2023. Within that vector, there were three dimensions of execution that we had to accomplish to be successful with the acquisition. The first was actually the people process technology and the cultural integration. And I'm happy to report that about nearly 18 months out, we feel like that effort feels complete. We feel like one company. And a lot of that synergies associated with that are now evident in our performance.
The second big piece was the margin expansion. As you know, when we acquired AQuity, the pro forma blended margins of IKS that were traditionally in the high 30s% had dropped to about 24% pro forma. And we had said at the time that as we transform AQuity's delivery model from a sort of human-led model to an IKS technology-led global human-in-the-loop model, we will bring our EBITDA numbers back towards sort of the early to mid-30s%. I'd like to say that I think a large part of that work is moving faster than we had anticipated, which is obviously being reflected in the numbers that we'll talk about for Q1. So I'd say that that sort of part of the work is maybe two-thirds done.
The last but not the least, and perhaps the most exciting part of the thesis really was the cross-sell motion of our platform into AQuity's large customer base. Happy to note that I think we've now figured out how that motion is going to work. We are starting to see some wins in that space. Now, obviously, those wins and the revenue impact of those wins is slightly offset by the intentionality by which we are cutting the tail of AQuity's small customers, number one. Second, the revenue in terms of sort of revenue per unit of physician coming down because now we are replacing the sort of AQuity human execution model with an IKS technology-led model.
So important to note that even as we are starting to feel early tailwinds of the cross-sell motion, some of them are offset by the intentionality of the pruning of the tail as well as the revenue per unit coming down even as margins improve in the AQuity customer base. So overall, I think a solid quarter of execution on the AQuity vector. Third, this predicament of establishing leadership in each of the point solutions, even as we continue to build the platform, I think it's great to receive some recognition from Black Book as the number one partner in AI-driven RCM and in medical coding, and then as it relates to clinical documentation, both by KLAS and Black Book. So continued progress in that dimension.
And of course, the biggest validation of progress there is customer wins, customer expansions, which we'll continue to talk about every quarter, and we'll continue to make some exciting progress in. We have now figured out our go-to-market strategy and have established our go-to-market teams in line with that go-to-market strategy. So we have four segments of the market: large single specialty groups, large primary care-led multispecialty groups, large health systems, large and medium-sized health systems, and then last but not the least, absolutely, a whole market segment is UnitedHealthcare, which is the largest employer of physicians in the world with 50,000+ physicians. And happy to note that I think we have now dedicated teams across all of these market segments that are really, really starting to hum and drive some energy.
And along the lines of the buying trends, I want to clarify, we continue to see more platform-based buying behavior across the large single specialty and the large multispecialty group market segment. The large health system market segment is still more point solution-oriented, so we have to drive the land and expand motion there. And then the mid-size health systems actually are starting to show more and more proclivity towards the platform pieces. So we continue to drive those along those lines. And then last but not the least, Care is an important, very, very important vector for our future, especially those of you that are not only interested in our next one, two, three years, but our next five, seven, ten years. We feel like we are in the process of building a very important moat, long-term moat, by becoming more and more of an outcome-oriented company.
So what do I mean by that? Right? Our pricing model was always percentage of customers revenue-based for E&M and a few days pricing, which has obviously been an advantage for us. But when I talk about being outcome-oriented, we're now actually talking about these constructs that fundamentally align us upstream with our customers in a manner where we achieve three things by doing this alignment of outcomes. First, we actually, while aligning ourselves with the outcomes, we are only in those constructs like we did in Palomar. We'll talk about Western Washington Medical Group again. We are actually only bringing the full manifest of the platform to those customers. So as a byproduct, we're creating more and more examples of the platform thesis and the value of the whole being greater than much of some of the individual parts. Second, these deals are typically much longer-term deals, right?
So, for example, Palomar is a 15-year deal. Western Washington is a 30-year deal for our practical purposes, perpetually. So they bring a different level of long-term stickiness to our core business model of the platform. And third, they actually create a second set of economics if we can do them right. Because now, not only are we getting our economics for the deployment of the platform, but we also get to participate in the outcomes that we generate through the platform on the client's P&L. So that could be a very those three sort of key criteria are the ones that we will continue to use to drive this outcome-oriented company thesis.
And the biggest execution challenge that it presents is that now not only are we responsible for the deployment of the platform, but we are also responsible for driving change in the customer's organization so that they actually produce the outcomes relative to what the platform can do. This has been a big challenge for customers, so we're solving for that challenge, but it is a unique sort of capability that we have to build over a period of time. And I'm happy to note again that in these dimensions, we've made some really good progress. You're all aware of the Western Washington deal, which we'll just recap here in a second. Also, the Palomar deal seems to be progressing tremendously ahead of plan.
And then the one concern that some of you had about Palomar in terms of their financial health, which I had mentioned at the time that likely that one of the three big systems in the area eventually buys Palomar. It looks like they are getting closer and closer to an alignment with UC San Diego, which could also have other positive effects for us if we actually end up delivering the value prop that we have for Palomar. So across each of the five strategic vectors, solid execution, happy to note. And all of that, I think, has resulted into a fairly strong quarter for the fiscal Q1 of fiscal year 26. Happy to note that we have been able to drive a 16% year-on-year growth for the quarter, coming to a revenue of about INR 740 crores on a constant currency basis. That's 13%.
As I was saying, we're gaining market share, not losing market share. Also important to note that this is in spite of the continued headwind of pruning the sort of AQuity tail, if you would, and the transformation that we continue to do in the AQuity install base as it relates to that affects their unit price realization that we get proposition, but improves our margin significantly. That margin improvement is actually reflected in our very strong EBITDA performance for the quarter, coming in at 32% or INR 238 crores, which really is a year-on-year growth of 36% in EBITDA margins, which then translated to an even stronger PAT growth of nearly 59% with our PAT coming in at INR 151 crores for the quarter.
Obviously, the PAT growth is even faster than the EBITDA growth, primarily because our interest costs are coming down as we are continuing to pay down the debts, which is something I'm sure that they will drive into, and then very important to note that all of this has been achieved, like I was saying, with 12,368 employees compared to the 13,277 that we had in Q1 of last fiscal, and that's, as I said, really important because this is the true reflection that for 16% growth or 13% constant currency growth, we have actually reduced the workforce net by 7%. So the gross reduction, as you can imagine, is pretty significant, and that shows the continued non-linearity in the business and our true demonstration of moving from human-led to tech-led while driving industry-leading growth. So that's been a high-level summary of how we've done in the quarter.
Moving on, and I'm going to invite Nithya shortly to talk a little bit about more details about this, but also just wanted to highlight a few key customer wins. Like I was saying, last quarter, we announced a very significant customer win in Sky Lakes' health system in the Pacific Northwest, where they had signed up for the full adoption of our platform, not only in the ambulatory side, but also have taken on our acute RCM solution end-to-end. Happy to note that we now have our second end-to-end. We have other acute RCM customers that are also ramping that are not end-to-end, but Mission Community Hospital is our second end-to-end acute RCM customer. So obviously, that segment, that mid-size health system segment of the market, is continuing to show promise.
Behavioral health is one of the most important and fastest-growing specialties in healthcare today, given the ramifications it has on chronic disease, and so happy to note that we have announced a relationship with Bicycle Health, which is a private AQuity-owned leading platform, already emerging as a leading platform for behavioral health, and then we've expanded our relationship with OrthoN Y to now include our Virtual Clinical Assistant program, which then moves that relationship to a full platform thesis, and then obviously, we've seen some continued growth in our top health system customers. This one is an example of our top health system that we've been able to drive tremendous cross-sell and are now expanding the coding relationship.
So, remember, like I said, in the large health system market, it's still a sort of land and expand motion, whereas in the other segments of the market, we're seeing more and more proclivity to the platform. So, an exciting quarter of client success. And then, last but not the least, actually two other points. Western Washington, we have a specific core dedicated to it, but just to recap, this is a monumental opportunity for us for several reasons. One, here we actually get to go all the way upstream and participate in the value creation with a significant-sized primary care-led multispecialty group.
We've, as you know, invested $17 million to get a 48% stake in the MSO that has a perpetual contract to manage all of the non-clinical operations, except, in fact, all of the operations other than the actual delivery of care by the doctors is managed by the MSO, and we have a 48% stake in the MSO for our investment, and that MSO is now contracted with IKS back to back to leverage our entire care enablement platform to help doctors in delivering better, safer, more efficient care, and so this also becomes, if you would, our live lab to demonstrate the full value of our platform in deep integration with the Epic system, which is, as you know, one of the most significant health record systems or systems of record prevailing in the provider community in the U.S.
And again, I think, for us, it checks all the three boxes of long-term stickiness, full platform adoption and integration with Epic, and then the second set of economics where our 48% stake in the MSO would actually create that second set of economics in addition to the traditional economics that the platform creates on our P&L. So super excited about this deal, and its success will be defined by, we anticipate, at the deployment of our platform, likely upside to 15%+ in revenue for the same patient mix and the same payer mix.
Now, that could be so transformative in terms of value creation both for the medical group and then our stake in the MSO that if they're able to do this, it creates a whole different model for the sustainability of physician-led transformation of healthcare in the U.S. and creates a fundamentally different set of growth vectors for us. So we'll continue to drive such opportunities thoughtfully and in a disciplined manner over a period of time and continue to report against them. And then again, last but not the least, I want to report out some recognition from the industry. Happy to note that our CFO, Nithya, has been awarded the Best Woman CFO by Businessw orld, and also we were recognized for significant success in the mergers and acquisitions organizational category for our AQuity deal.
And then this one is a very important vector where we've been working very hard on making our employee experience unique. And happy to note that I think not only do we have recognition, but we're actually at a point where I think our employee turnover is at an all-time low from the history of IKS. So with that, all in all, a strong quarter, continued progress along the dimensions that we had said. And I'll now turn it over to Nithya to talk us through some financial details of the quarter, after which we'll open up for questions.
Thank you, Sachin. Good morning, everyone. We have already covered the highlights on this slide, so why don't we dive straight into our cash flow metrics? Harjit, you can go to the next slide. In terms of operating cash flow, we entered the quarter at 165 crores, and free cash flow came in at 137 crores. These numbers are net of an upfront performance guarantee we have extended to the tune of $5 million to a multispecialty primary care organization, one of the market segments that Sachin had highlighted earlier in the call today. With our continued strong cash generation, our net debt position continues to improve. As you can see, by the end of the quarter, our net debt position stood at 448 crores, and the continued cash generation in the future quarters as well will continue to see this number improve.
If you can go back to the previous slide. Our EPS for the quarter stood at INR 9, which represents a 58% growth year-on-year and a 2% growth quarter-on-quarter. Our return on AQuity metrics, again, remain very healthy and very strong. For the quarter, our return on AQuity metric stood at 31%. Next slide. So I call out a few highlights on this slide. In terms of forex impact, it was quite insignificant and minimal in the quarter. Our employee benefit expense in the quarter stood at 52.3% of revenues compared to 51.8% in the previous quarter. This increase is despite the net reduction in employee count because we do continue to invest in technology as well as increments. And despite this employee benefit expense increase, our EBITDA for the quarter came in at 32%, which is a meaningful 90 basis points improvement from Q4, where we reported 31.2%.
Looking at PAT, PAT came in at 20.5% or INR 151 crores. Again, the growth in PAT is, in fact, even faster than EBITDA growth, largely because the finance cost continues to come down. You will note that the number was actually INR 26 crores in Q1 of last year versus INR 18 crores in the current quarter, and that is reflective of our debt repayment as well as the lower interest rate. Our ETR for the quarter stood at 22%. We have lost tax breaks in one of the SEZ units that we operate out of. For the full year, it's likely to remain in the same range. Our adjusted profit for the period adjusting out amortization of intangible assets stood at 22.7%. So Harjit, if you can go and look at the next slide where we talk about our important KPIs.
Our Adjusted EBITDA per employee annualized number continues to improve quarter on quarter. As you can note, it was INR 0.8 million in the quarter. Our revenue from top 10 as well as top five customers continues to improve with our continued winning of client deals that you would have noted both in Q4 as well as Q1 now. Aging of top 10 and top five customers, again, the vintage remains very, very strong at more than five years in both these categories. Compared to Q4, the slight dip is, in fact, due to the fact that some of our newer customers have ramped up much faster than what we have historically seen. And we continue to expect to report healthy numbers in the future quarters as well. Thank you, Sachin. Over to you.
Great. Thank you, Nithya. Again, excited about our performance this last quarter and what it means for the future. Also in line with continuing to build both best-in-class governance as well as surround ourselves with some of the wisest and most contextual minds in healthcare. Happy to note that we're adding Dr. Garheng Kong to our board. Garheng is quite an exceptional professional and leader with undergrad degrees from Stanford and MD, PhD, MBAs from Duke. But equally importantly, after a flourishing career in consulting, interning at McKinsey, he started his own fund, HealthQuest Capital, which now invests across the entire spectrum of deals from startups to publicly traded companies. He's a lead independent director on large publicly traded companies like LabCorp and also happens to be on the board of the Duke University Health System. So tremendous, tremendous context and leadership.
And we'll continue to see that we will do whatever we can, whatever it makes sense, to surround ourselves with thoughtful leaders that can keep us both grounded but continue to expand our aspirations in the marketplace. So excited to have Garheng. With that, I think that concludes our prepared remarks for the quarter. Again, very excited about our performance last quarter. The teams have worked really, really hard. And happy to take questions from here. Over to you, operator.
Thank you very much, sir. We will now begin the question and answer session. Anyone who wishes to ask questions may press star and one on their touch-tone phone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use only the handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Sagar Dhawan from ValueQuest. Please go ahead.
Thank you and congratulations on a good set of numbers. My first question is on the growth that we are seeing in the top five client bucket. Just wanted to understand better what is driving this. Is this sort of just sort of one client scaling up, or is it more broad-based? Is it other clients, is it due to cross-selling of acute into the cross-selling to a new acute client, or is it more outsourcing by some of the clients? Just wanted to understand what is driving this and how sustainable is this. I mean, in the near term, should we assume that such kind of growth will continue in the near term as well?
So great. Thank you for the question, Sagar, and thank you for joining this morning. Yes, look, I think our top five customer trend is healthy. And I think the answer lies in all of the above, in the points that you noted. There is momentum being seen on the cross-sell of AQuity in one of the customers. There are these large platform deals that we've signed that have kicked in into that top five. And the reality is, I mean, if you think about it, when I look at the wallet of our top five customers, the wallet potential for our platform, we are nowhere near 100% wallet.
So I think, one, it's a great sign that the top five customers are growing. And sure, if we continue to execute like this, there is no reason to believe that the top five customer growth should be heavy. Now, you might not see it linearly like this in every quarter, but when you look at it over a significant time horizon, given the wallet opportunity of our top five customers and the strength of our platform, there's absolutely reason to believe that that growth should sustain.
Understood, sir, and just on the Palomar deal, if you could provide an update on how it is scaling up because it's been like eight, nine months now, so are you seeing the upsides that you had thought about?
Yeah, Sagar, thank you for asking again. Yes, I think we're ahead of plan, actually. I can't go into the specifics here, but I'd like to say that so far, we've been delighted. Our teams have executed tremendously on the deal that even as we are not even fully implemented on all the features of the platform, our financial pro forma six months in is better than what we thought it was going to be, even though we're not fully implemented.
So we continue to be really optimistic about what the Palomar deal will produce for us and at what pace. Also, as you know now, the one concern that some of you had about the financial future of Palomar, that continues to be looking a little bit more constructive, and that creates its own additional opportunities depending on which system eventually ends up with them. So yeah, very positive on the Palomar deal. Yes.
Got it. Understood. And one last question from my side is on the tail cutting that we're doing on the AQuity side. Just wanted to understand how meaningful of a drag that has been on the growth in this quarter, and what could have been the growth if the tail cutting was not happening?
Yeah, Sagar, I think I'll refrain from providing those specifics, but I will say that it's material. I'm comfortable saying that the drag is material, and that is why even as we are continuing to be intentional, we are trying to manage the drag in a manner that the cutting of the tail is real because the reality is that cutting of the tail is also helping with margin growth. But at the same time, it's not so dramatic that it offsets our organic growth, which I think is returning back very strongly. So material drag, but managed to the best of our abilities.
Got it. And till when is this process going to continue? You said you want to reach about 500 clients, but just a rough timeline as to by when this process could be completed?
That's a tough one, Sagar. Look, it could be as much as another two to three quarters because, like I said, there's two factors here, right? One, even as we want to cut the tail, we don't want to let the customers down. They have been relying on us for performance, so we can't just sort of knee-jerk our way out of it. And second, the reality is we don't want it to have a dramatic drag in just one or two quarters. And so I think perhaps another two to three quarters is the way to think about it, and we'll let you know if sort of that changes.
Understood.
We have 150-odd customers, so.
Got it, sir. Got it. Thank you for taking my questions and all the best. Thank you.
Thank you, Sagar.
Thank you. The next question is from the line of Srinath V from Bellwether. Please go ahead.
Hi. Hi, Sachin. Taking on the same kind of Palomar discussion, I want to understand what is the path of the full implementation of the care enablement platform? How does this whole thing work? And I want to understand, let's say if you assume they have 100 physicians, roughly how many of their physicians have partially taken one of the main suites of products of ours? What percentage of the physicians have actually taken the full platform? And would it be fair to assume that somewhere in this financial year, we would reach peak revenue potential in Palomar? Just want a qualitative understanding.
Yes. Great. Thank you, Srinath. Great question. So first of all, the commitment as a part of the deal is for 100% of the physicians to take the full manifest of the platform. So that is the definition of the full implementation. And the way we are rolling it out is there are some features that are already centralized in the way they operate. Those were the features that we implemented first because what is already centralized is easier to drive as a part of the platform. And so those have been materially implemented already, and the others are well on their way. It is totally fair to assume that perhaps by the end of this, which is fiscal Q2, we would be fully implemented across all the features, across nearly 100% of the physicians at Palomar.
And so yes, we would have reached our peak revenue potential at Palomar at that point. Now, again, our peak revenue potential is, as you know, driven by two aspects. One is the platform fee, but then really the kicker comes in the upsides. And so those upsides will obviously be evident in our numbers, in our accounting numbers at the end of the year because that's when they are calibrated. But yes, on the platform fee, the peak would have been achieved by the end of fiscal Q2.
Perfect. Perfect. I would like to understand.
Go ahead.
No, no. Please go ahead. Please go ahead, Sachin. Sorry.
No, Srinath, you're asking about how long does it typically take. So it's a work in progress. It depends on the change management sophistication in the organization. It depends on how much is already centralized versus not centralized, how good are the physician champions in the organization that are able to drive the change, how long does it take us if it's an EHR where we already have integration versus an EHR where as a part of the deal, we have to build the integration. So there are three or four factors that go into defining how long the full platform implementation might take.
But of course, our objective is, on an overall basis, eventually to get to a point once it's more mature where over a 120-150-day period, we can have the full platform implemented across the entire physician base of the customer that we are committed to.
Perfect. Perfect. Wanted to understand, given if Palomar does get acquired by one of the other players, this is a very IT question. Bear with me on this. There's normally some sort of vendor consolidation that takes place. How have you assessed this? Would it be fair to assume since we are so well integrated into Palomar that we are somewhat safe from vendor consolidation? Any broad views that you have on this? That would be great.
Yeah. Yeah. No, so given that we were potentially anticipating a change of control, even when we did the deal, Srinath, we had already built a no-out in the event of change of control. So first of all, there's a very, very penal contractual protection that will probably be a huge deterrent. But we don't like to rely on just the contractual protection. So the real value is the excitement that we are experiencing from the Palomar physicians.
And what we are most excited about in talking to their CEO is the fact that if we're able to demonstrate the type of ROI that we are talking about, Srinath, I think it will be impossible to imagine that whoever the acquirer is, whether it's UC San Diego or one of the other two systems, they would not want to adopt some manifest of such an approach in their employed physician base, which is 10 times the size of Palomar's employed physician base. You never know what exactly will happen, but one, I think we are contractually totally protected. And second, I think there's more opportunity than risk in Palomar integrating with one of the large systems in the area.
Perfect. Just the last question on AQuity. I want to understand what percentage or anything you can share on AQuity customer migration to the Ambient AI IKS product. Given that it delivers significantly more value at a significantly lower price, one would assume that within one year, which would be a standard contracting cycle, then a large part of customers would have migrated, but I don't think that is the case. So I want to understand where are we on the migration? Is it 30%, 40%, 50% of the customers? And if there's a bottleneck, what would be the bottleneck? And thanks a lot for answering all my questions in great detail.
Sure, Srinath. No, I think, look, the bottleneck is really organizational inertia more than anything else. And so these are large health systems that have relatively long decision cycles. And so I would say that we are not near the completion of this transition. And like I was saying earlier, I think just like the cutting of the tail perhaps has another two to three quarters of runway. I think the remainder of this fiscal year is probably a good way to think about when that transition might get completed. Different customers are in different phases of that transition. And remember, the transition is in two features, not just clinical documentation, but we're also driving that transition in medical coding. But again, they were in medical coding in a very, very heavy human-led, stateside human-led model.
And now with our autonomous coding across two specialties and our superior global execution coupled with autonomous coding, we're also driving transition there. So I'd say perhaps a fair way to think about it is over the rest of this fiscal, we should have largely completed that transition, which is why.
Thanks a lot, Sachin.
By that time, we would have gotten our operating margins at EBITDA to a place that could perhaps be called sort of steady state.
Perfect. Thanks. Thanks a lot. I'll get back into the questions too.
Thank you.
Thank you. The next question is from the line of Ruchi Mukhija from ICICI Securities. Please go ahead.
Thank you for the opportunity and congratulations to our Sachin and team of a great set of numbers. First question, we are now in an 18-month journey of transitioning AQuity business. Also, the loss of large clients and the start of last fiscal is in the base. So is it fair to assume that now as we transition to different quarters of current fiscal, we should see the year-on-year growth momentum of our business accelerate and move more closer to what we used to do prior to AQuity moving like a 20% growth mark?
Hi, Ruchi. Thank you for the question. As you know, we don't give guidance on future growth, but I think the clue's lying in the answers that I sort of tried to give earlier, which is I think we still have two to three more quarters of AQuity customer tail reduction as well as AQuity margin optimization. And so perhaps fair to assume that the headwinds in revenue associated with those two endeavors should be completed by towards the end of this fiscal, let's say, fiscal Q4, certainly fiscal Q4. So I think that probably is the timing to think about the return to pure growth margins, sorry, pure growth versus sort of pure organic growth being offset by some of this intentional headwind that we are driving to drive that sort of balance between revenue growth and margin growth.
Got it.
Yeah. Secondly, in our top five clients, it looks like the Palomar deal has scaled up, and now we have different set of top five clients. Also, it would be great if you could talk about the transition time for Palomar, and do we expect similar transition time for the Western Washington Medical Group with two to three-quarter transition? Should that also lead to change in our top five customers?
Good question. Palomar, like I was saying in my earlier question, I think by the end of this quarter, the current quarter that we're in, we should have completed the full implementation. On Western Washington, yeah, I think it's a fair assumption that in about 120-odd days from now, we should be fully implemented. It's subject to us getting the full EHR integration going, which we are working on. That's the only sort of bottleneck there, and we're working through that process, so perhaps another 120-odd days. Whether or not Western Washington enters our top five, I can't tell you, Ruchi, right now, because it's also a function of what happens to the current top five and how quickly they grow over the next 120 to 150 days. But obviously, it will become a substantial customer, and certainly in the top 10, perhaps in 120 to 150 days from now.
Got it. And lastly, could you highlight to us how the cross-sell deals or cross-sell activities panned out during the quarter selling IKS solution to existing customers?
Yeah. Look, like I was saying earlier, I think we are still in the early innings of that journey. But the good news is that I think we've figured out how to orchestrate it, more or less, how to work in that motion that is activated by the legacy AQuity salespeople, and then how they partner with the sort of overlay partner sales engine that we built that can elevate the conversation. So I think plenty of green shoots. One, we actually announced publicly a top five health system in the country where we have driven a cross-sell motion very successfully. And there's several others in the hopper. Another one of them is a top five health system in the country.
So I'd say still early, but I feel like after a whole bunch of sort of trial experimentation, what works, what doesn't work, how to incentivize both the sales engines appropriately, first trying to do it with a platform approach, but then learning that large health systems don't yet have the appetite for the platform approach, but have much greater proclivity for point solutions. I think we've figured out the motion. And so hopefully, we'll see the fruits of that, and I can do a second tick mark on that cross-sell motion in the next quarter or.
Got it. This one is for Nithya. You did mention that this quarter, we paid $5 million as part of one of the deals. Do we expect such payout during the current quarter besides Western Washington Medical Group in any of the other deals?
Ruchi, I'll obviously not be able to talk about what might or might not pan out in the current quarter, but I think from a more philosophical perspective, Sachin and I had mentioned earlier that in each of the market segments that we operate in, we might do one deal or two. These almost always tend to be full platform deals, and these tend to be very, very long-term deals as well. This helps us establish the benchmark in terms of what a platform deal can deliver in each of these market segments.
Got it. Thank you, and all the best.
Thank you.
Thank you.
Thank you. The next question is from the line of Nilesh Jain from Astute Investment Management. Please go ahead.
Hi. Thank you for the opportunity, and congratulations, Sachin, for a great set of numbers. My first question is on your revenue growth. Obviously, top five has grown very well to the north of 70%. But when I look at your other top five clients and apart from top 10, it has been flat, more or less. So how should we look at the top 10 growth apart from your top five? Maybe you can talk about the organic side of the growth. We can understand that over time, once you cut down the tail, we can expect at least you grow faster than the outsourcing industry, which is expected to grow at 12%.
Yeah. So I think, again, I'll just sort of at the risk of repetitive, I'll say that first of all, on a quarter-on-quarter basis, it's not easy to. I wouldn't call one quarter a trend where the top five are growing and the top 10, the next five, which are the top 10, are not growing so much that now that's a trend. I wouldn't go so far as to say that. Let's play it out. Right now, I can tell you that we're seeing fairly secular growth across existing customers and the new pipeline. And as you can imagine, given that the cutting of the tail and the transformation of the AQuity book has a drag on the revenue growth, and I said it's a bit of a material drag, you can estimate what the organic growth really looks like, right? And that's what I would say.
It's very hard for me, and I'm deliberately not trying to not answer your question, but I don't want to give guidance. I can't give guidance, number one, and number two, I continue to believe passionately that if we continue executing it the way we are, we will continue to grow significantly faster than the 12% TAM growth.
Probably maybe you can just help me with the organic growth. Just a rough range, that will be helpful if you can share.
What do you mean by organic growth? What do you mean by organic growth? All focus on organic only, no?
Last year, base would have an AQuity number as well, right, which might not have grown as compared to, I guess, legacy clients.
Yeah, but now, see, by the same quarter last year, the integration was complete. So all growth compared to Q1 FY 2025 is all absolutely organic growth. So because there is growth in some AQuity customers as well. If you're asking me to tell you what is the reduction of revenue in AQuity and increase in IKS, that, unfortunately, I can't do because we are really operating like one company, right? Now there's no longer an AQuity account or an IKS account, right? There are so many accounts where we have already activated a cross-sell motion, and so those accounts are joint customers.
So I don't know whether to account their revenue in legacy AQuity or legacy IKS. I don't know how to strip those out together. But again, I think if you just do broad math around, we have 16% growth in spite of material headwind associated with what we are deliberately doing on customer tail and revenue optimization. It should give you a fairly decent idea of what the growth net of that or prior to that would look like, right?
Okay. Okay. No problem. Thank you. My second question is on you talked about Radiology Partners. So I just wanted to understand how is that progress going on on that side, and are we looking at any JV sort of transaction there?
So that relationship is interesting in that it has not yet converted to a JV. The way we have structured that relationship was that it has to grow to a certain threshold, at which point it makes sense to JV. The relationship has not yet grown to that threshold. So I don't see a JV conversion happening in the next couple of quarters, but we'll continue to track how that goes. The key there is my whole concept on a JV here, Nilesh, on any of these JVs is first, the customer should have fully manifested the platform in their installed base. Now, they have 3,000 radiologists.
There's still a long, long way to go before a large part of their 3,000 radiologists have adopted this program. Also, we've already started to figure out a whole bunch of tech interventions that are changing that Virtual Radiology Assistant model even as we were implementing them. So I think more to come, not close to JV yet.
Okay. So my last question is to Nithya. I wanted to understand on the employee side. Obviously, we have been reducing the employee count since the last few quarters. So I wanted to understand how do we see the general trend in terms of have we gone more or less on the rationalization of the employee side? How do we see there's further scope there?
So you'll obviously see a balance in terms of our continued optimization of the legacy AQuity workforce. I think, like Sachin pointed out, there's at least another two to three quarters where we'll continue to optimize as we deploy our technology and achieve the right balance between onshoring and offshoring. However, we are, of course, growing, even as I say that in the same breath, we're also growing significantly in other parts of our business. And therefore, we do need to—we do need to, therefore, support that growth with additional employees, both in terms of technologies as well as other administrative employees. So I think overall, you'd probably see that number inch up in the rest of the year as we continue to support the growth that we're anticipating.
Sure. Sure. And just on the EBITDA margin, once we reach mid-30s, do we expect to see further scope of expansion there of margins over time? Two to three years, time frame?
Look, I think we've said continuously that we expect to get somewhere in the early to mid 30s. As you can see, we're already past the early 30s, almost well ahead of what we had said. And so I just still maintain that, Nilesh, that we will see ourselves getting to early to mid 30s, and we think margins should stabilize at that rate. To try and say that margins could improve beyond the early to mid 30s, I don't feel comfortable saying that. I think our target still continues to be early to mid 30s. And as you can see from our performance, we feel very confident about achieving that.
So thank you, and I wish you all the best.
Thank you, Nilesh.
Thank you.
Thank you. The next question is from the line of Seema Nayak from ICICI Securities. Please go ahead.
Hi. Congratulations on a good quarter. With the headcount down about 300 quarter-on-quarter, how far are we pushing this lever? And with new deals announced, is there going to be a hiring expected going forward? And what is your idealized ideal annualized EBITDA per employee that you are targeting? Yeah.
Okay. So look, I think on the headcount, yes, look, there will be quarter-on-quarter fluctuations based on deal ramps, which is why I constantly point everyone to please look at year-on-year trends versus quarter-on-quarter trends. The trend that you're seeing year-on-year is a real trend. The trend that you're seeing consecutive quarter is loaded with all sorts of noise around one customer ramp related to things happening in that customer, a new customer start. So I would suggest if you really want to trend that, please look at it year-on-year. And that year-on-year trend is probably the most telling factor. On the EBITDA per employee, look, the way to track this is really, like we have said, early to mid EBITDAs at the corporate level because also remember, look, we were traditionally 1.5%, 2% R&D expense. Today, we are close to 5% R&D expense.
We are setting up an AI Center of Excellence. We're just about to announce a Chief AI Officer under which the Center of Excellence will be built. There's a whole bunch of things happening that are factored into our sort of general thinking of early to mid 30s. At least my humble belief is that with the type of growth that we're driving organically with these type of early to mid 30 margins sustained and the type of ROE, I think this is probably a good place to be.
That's sort of how I would suggest we play it out. If there's anything else specifically that you're looking for in the EBITDA per employee, we can take it offline. But I think in general, I would say I'll point you back to early to mid 30s corporate EBITDA in spite of continued investment in sales and marketing and significant continued investment in R&D.
Yeah, that's helpful. Thanks.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Saransh Mundra for closing comments. Thank you, and over to you, sir.
Thank you, everyone, for joining the call. Please reach out in case you have any additional questions. We'll be very happy to answer. Thank you.
Thank you, everyone. Appreciate it.
Thank you very much, sir. Thank you, members of the management. Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.