Ladies and gentlemen, good day, and welcome to the Tech Mahindra Limited Q1 FY24 earnings conference call. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. CP Gurnani, MD and CEO, Tech Mahindra. Thank you, over to you, sir.
Yeah, good morning, good afternoon, good evening, wherever you all are. Thank you for joining this call. This Q1 2024 earnings call, I have with me my senior leadership. Most of you all have interacted with, but I do have my other colleague, Mohit Joshi, who is taking over from me, and he's MD and CEO designate. I want to take this opportunity on behalf of all of you to welcome Mohit Joshi to Tech Mahindra. He has now spent about five weeks into the company, and as the old saying goes, baptism by fire. Sure enough, he is getting that exposure. At the same time, he will share his own experiences with you. Tough times don't last, unprecedented times don't last, you know, challenges of global economy, challenges of communication media sector.
I think I can keep counting the various reasons why Tech Mahindra has faced one of its toughest quarters in recent times. My own personal belief is, some of the transformative projects coming to an end, one-off customers declaring bankruptcy, a few challenges on the road, and overall, the revenue drop and our costs. I mean, we have not been able to balance it right. Which has become a prescription for a reasonably bad quarter in terms of our overall performance. I can only see an upside. An upside has really three or four reasons why I think we have a decent upside. Number one is our customer focus, customer relationships. Our dialogue with the customers is still very, very strong.
That effectively means is that we can plan a lot better, and we can also be, you know, Our customer centricity will help us recover from where we are. Number two is our investment in talent. Just to give you an example, we trained 8,000 people last quarter, upskill, in new AI platforms and in generative AI. Effectively, that means is that we have utilized some of these challenges to repurpose and retrain our people. Focus on people, focus on talent, and overall, a very, very strong Generative AI Studio, developing a lot of solutions and use cases, I think will help us as we go forward. I mean, thirdly, I think, we clearly are again investing or making sure that we continue with our investments, not only in the new technologies.
I think those overall are differentiators being 5G-connected solutions and networks and experience management through BORN, I think will continue to be very strong differentiators, and we will convert them into solutions for the clients, not only 30 use cases that I said about AI, but also by increasing our reach with the clients. Last but not the least, I mean, there are operating levers. We, both Harsh and Rohit, have worked on those operating levers, and we are getting into that mode of execute, execute. While we have got, you know, various accolades also from our technology partners, from different customers, but I think it is important to recognize that our results could have been better.
You know, I can take you through the results, I think the best way is to reinforce my confidence that this quarter is a blip in our growth trajectory. We have a robust pipeline of opportunities across all geographies, across all verticals, across all service lines. We pride ourselves on our customer centricity and people centricity. We are confident in our ability to overcome the current challenges, and we will emerge stronger as a leader in IT services industry. We have a solid foundation of capabilities, assets, values that differentiate us from our competitors. The market demand is still strong, and we do believe that we are in a position for future growth. I can only reinforce that treat this as a blip, and we are getting better focused on execution, more agile on meeting revenue and costs. Over to you, Rohit.
I mean, if you would like to take us through the numbers. I mean, somehow I don't have that, you know, I'm trying to avoid getting into the-
Yeah.
the real number, the numbers right now.
Sure, I'll take it. Good evening, everyone. Good morning, good afternoon, based on where you are. Let me cover the few company financials for the quarter ending June 2023. We ended the first quarter with revenue of $1,601 million, versus $1,668 million last quarter, which was a sequential decline of 4% QoQ. The decline was more in our CME vertical, which declined by 9.4%, while the enterprise decline was marginal at 0.4% QoQ. Our TCV deals were lower than the previous quarter at $359 million. Revenue in INR terms was INR 13,959 crores, versus INR 13,718 crore in Q4, showing a reduction of 4.1% QoQ.
The EBIT for the quarter was at $108 million, rupee terms, INR 891 crores, versus last quarter at $186 million, in rupee terms, INR 1,550 crores in Q4. The EBIT margin was at 6.8%, a drop of 140 basis points due to three areas of drop. One. Revenue drop impacting margins. Quarter-to-quarter, we had to take some one-time provisions in the quarter, mainly driven by certain customer declaring bankruptcy, and on accounting principles, we had to reserve for that exposure. That caused a one-time provision in the quarter, impacting margin by approximately 2%. The seasonality in Cognizant, where the top line decreased, impacts margin by half a percent.
The 2% on one-time provision reduction, 2% broadly on revenue drop, impacting margins, and half a percent due to cognitive impact. That's kind of the broad approach in margins. Look at the low EBIT. Other income for the quarter was at $23 million, versus $37 million in Q4. Forex gain was $5.4 million, compared to a loss of $800,000 in Q4. The effective tax rate for the quarter was 27.6%, and PAT back for the quarter was at $84 million, in rupee terms, INR 693 crores. Net profit margin for the quarter was at 5.3%. Our free cash flow for Q1 FY24 was $106 million, 126% of PAT. DSO was up by two days at 98, compared to Q4 at 96.
As mentioned earlier, we continue to consistently follow a rule-based hedging policy. As of June 2023, the total hedge book was $2.7 billion, versus $2.3 billion in Q4 2023. Based on hedge accounting treatment, net mark to market at the end of 30 June was $33 million, which $8 million was taken to the P&L, and the rest, $25 million, was taken in reserves. We had a cash equivalent of $939 million, in rupee terms, INR 7,701 crores as of 30 June. In summary, I'd like to reiterate that we're committed towards executing the planned targeted actions, as CP mentioned, to improve our profitability, as we head into the rest of the year. I'm now open for any comments, remarks, and questions. Over to you, sir.
Rohit, I'll just interrupt for 30 seconds. I just wanted again to welcome Rohit. Rohit, if you would like to just say hello to your analysts and-
Thank you, CP. It's great to speak to all of you again. Just to make a couple of quick points, really three points. The first is that, as CP mentioned, there has now been five weeks since I joined Tech M, and I've really been gratified by the very warm welcome I've received from, you know, from the teams, from the wider ecosystem, from many of you, and from our clients. The second piece is that over the past 4-6 weeks, I've had the opportunity to visit with many of our clients, to visit with many of our centers, to take stock of our service lines. I'm very enthused by what I see, right? Really a very strong connect with the employees.
We really have a very unique affinity to Tech Mahindra and to the broader Mahindra Group and its values. got to meet a set of customers who, again, in most cases, have had a multi-decade relationship with TechM, and really see us as an integral part of their tech-driven transformation journeys. got to a sense of our service lines, right, which really have seen a lot of investment, are cutting edge, and across the board, are being infused with AI as well. The final point I wanted to make was, obviously, we've had a challenging quarter, but in the medium to long run, again, given what I've seen of the company, our clients, the ecosystem, I remain very optimistic about the opportunities in front of us.
I look forward to working with, you know, with all of you know, through many, many years to come. Thanks, and thank you. Thank you. We now open, thanks, Mohit. We now open it up for questions. Please take it up as it comes.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Thanks, thanks for the opportunity. The first question is, looking at the decline in the revenue at close to 4%, is it fair to say that most of the headwinds on the communication side is fairly behind, where you may see a gradual recovery, or you believe full quarter impact, which has not come in the first quarter, may come in the second quarter? Rohit, just a bookkeeping question. In terms of 200 basis points provision for doubtful debt, looks like the client may have a revenue above $100 million. Looks like a big client, is it in the telecom account or in the enterprise? Congratulations, Mohit Joshi, and all the best.
Yeah. Maybe I'll answer the second one first, Sandeep. Then we'll go to the first one. On the second one, you know, it's a cumulative number from the discussion with the customer had been ongoing for the last three, four quarters, right? That amount is a pileup of that. The annualized quarterly revenues already in the Q1 baseline is impacted, so we've not taken that revenue, right? It's quarter-over-quarter, not gonna have a decline or any impact to the year in terms of that rate. The culmination of three, four quarters of impact. That's on the one-timer. Then in terms of communications, I would say you're right, most of the headwind is behind us as we look forward.
In general, the telcos are still pretty tight on their budgets on any capital outlay as a project, as well as on OpEx. They focus a lot on OpEx reduction. As we move forward, we'll continue to work closely with them to ensure that, you know, we align our strategy in making sure we help them drive more outcomes, you know, as we look for the rest of the year and then, and the next year forward. I'll also request Manish, who's on the call, to give a little bit more flavor on as he looks forward for the rest of the year, how does he see it across regions and customers?
Well, sure, Rohit. I'll just add one additional point to what you just said. I do concur with Rohit that the worst is behind us, most of the headwinds we have seen. There is another factor that does happen in Q1, I hope all of you do recall, is there is an element of cyclical nature to our one or two of our businesses. That also plays out in Q1. Our endeavor always is to try and compensate for that through additional growth. This was like a perfect storm, where all budgetary pressures on discretionary as well as the cost takeout on current OpEx, all three factors were happening at the same time. Fundamentally and structurally, I think we are still very well placed to continue to scale growth from here on.
Okay, okay. Rohit, how to look at margins going forward? Question to Mr. Mohit, as you have joined, it looks like both the departments on margin and revenue growth needs a turnaround. Would you like to first focus on margins and then look for turnaround, or you may look to handle both and repair both on a going-forward basis?
So, uh, Sandeep, maybe I'll take it up first in terms of our actions and then pass it on to Mohit for his view. You know, when you look at where we are in terms of I think there are three, four areas that we've articulated before, which we continue to execute. We've seen some improvement in these metrics, but I think there's more to be desired. If you look at subcon, our cons were 16% of revenue, which we now move closer towards 14, and we said that we will continue to aspire and get towards less than 10% there, right? That continues to be a focus area as we move forward for the rest of the year.
When we look at our juniorization pyramid structure, we've articulated that that's an area of improvement. As we go forward, we'll continue to invest in that and make sure we bring more juniors into the organization, driving more efficient average resource cost. That should help us gain more productivity as we move forward. We'll continue to drive offshoring that we had mentioned that we have a room of 4%-5% improvement in medium term. Continue to execute on that. These are the operating levers we feel comfortable available to us to execute as we move forward. The divestment for non-strategic portfolio, while it has small impact on margin improvement, it does have significant impact on managerial bandwidth to focus on what matters more.
We'll continue to drive that also for the rest of the year. These are some of the levers that we'll work on, and we've mentioned those in the past as well. I'll hand it over to Mohit to give you his.
Yeah. I want just to add to what Rohit said. Look, at the end of the day, it has only been 5 weeks from in the organization, and I'm more in a mode to listen and to learn. We have an extended transition over the next 5-6 months. We'll develop a plan and consult with the entire team, to turn the trajectory around. Again, I'm sure a lot of those actions will be similar to the ones that Rohit has just outlined.
Okay, fair enough. Thanks. All the best. We'll come in the follow-up.
Thank you. The next question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.
Yeah, hi. Thanks for taking my question. My question, just have two questions. One question I have for Manish regarding the telecom segment. You just described this quarter's thing in as a perfect storm, in which the entire spend on the discretionary part and CapEx and everything was put on hold. Just wanted to dig a bit deeper on that. How, what should I say? How deeply entrenched is that what you saw in this quarter? I mean, what you saw in this quarter, was it just, I mean, things that have been piling up for the last three quarters, and it just I mean, eventually, they came into being in this quarter or do you think... Sorry?
Your voice is not clear. Can you use the handset, please?
Okay, sure, Sir. Is it better?
Slightly better.
Yeah, sure. Manish, again, sorry, just to reiterate on my question. Just wanted to dig a bit deeper on to what exactly transpired in the telecom sector, and, how do you see this going forward? I mean, do you think that large part of the cuts that you saw in this quarter, are kind of done, and they hereafter, we've kind of hit a bottom in this one? Or clients are still reluctant to spend, and there could be more cut in discretionary spends going forward in the coming quarters? Any other, scope of, let's say, recovery in the telecom spends that you could see over the next, few quarters?
Absolutely, Vibhor. Thank you for that question. Look, I don't think anything in this large industry happens in very short bursts. There is obviously patterns. There are things that we've been discussing over the last several quarters as well, in terms of how the industry is shaping up. We've seen the results of many of our other esteemed competitors as well in terms of the pressure point they are facing. The way we look at it and we are analyzing the situation is, that there will be lot of reprioritization that will continue to happen on digital transformation projects. They are evaluating, almost all the major operators are evaluating things on where they need to press the pedal versus where they need to take off the accelerator.
We are very well entrenched in all those conversations with most of our key customers to understand that. The other pressure point is, of course, on the OpEx, because and the cost of capital has changed dramatically. Clearly, the need to generate more cash is more acute at this point in the industry, and that also is what is driving it. Now, I can't predict how soon will things ease out on that. Where we have a good vantage point and the viewpoint is from our funnel and our pipeline and our discussions, both in terms of cost as well as opportunities. From that standpoint, which is why I called it a perfect storm last quarter, that, you know, maybe we hit the mark and we now need to start gradually inching forward.
I'm not necessarily saying that all and every pressure point is over and done with. Some of those we'll have to continue to deal with. It will be a gradual progress in terms of recovery for the industry and as a result, for someone like us. I think we will start making good progress from this quarter and definitely from the second half of the year.
Got it. Thanks for that very detailed explanation. My second question was on the enterprise business, and especially on the manufacturing vertical. I think the manufacturing vertical has held up quite well for us over the past seven, eight quarters. I think in the eye of the cut in discretionary spend. Just wanted to basically understand how is this segment looking? Because I think we've seen this for other players as well. The manufacturing vertical continues to be the one where everybody almost all the IT vendors are kind of seeing continuous growth. So is this vertical where we could see maybe this growth pattern and the spending continue? Or how is... What is our conversation with our clients leading us to believe?
Maybe I'll add a little bit of flavor to this, and request Vibhor to add a few more points. Just if you look at manufacturing, overall, the industry is going through a transformation, right. When you look at any segment within manufacturing, more and more digitization is happening. More and more embedded software are getting created in the machine. That is making the change in terms of the requirement from those companies in terms of services they request from us, right. The requirement is more becoming software-oriented. The engineers' skills that are requirement, that is being gathered is getting more software-oriented. With that, there's a lot of transformation happening, and we've seen the demand shift more in that nature.
When you look at our focus from a manufacturing standpoint, we are heavily entrenched with automobile, aero, right? Both of them are gRoWing very, very positively, right, from an industry dynamics perspective. Lot of automobiles are switching their plans from the existing car to, you know, the mechanical cars to more EV. As they need platform orientation, they need engineering support there, they need the system to be put together. A lot of the investments that are happening in that space, that is helping us favorably. The aero vertical is back to shape, with travel coming back. Our demand is being helped by that change, right? I think that's something we've also recognized, and we continue to invest in this vertical.
We've done, you know, we did some inorganic investments also, around Thirdware which will helping us in the same competency that we got. All of that together is helping us penetrate the clients better. We're helping them service with more and more service lines, not just IT engineering support, you know, be it commerce from an experience design standpoint or BPS, which is a very strong and robust franchise for us. It's helping us penetrate better with the same client, with the credibility we've been able to drive, and that legacy is very strong from a manufacturing standpoint. That's kind of the underlying reason why we feel good about it, and we see that the trend will continue favorably as we look for the rest of the year.
Maybe, Jagdish, you want to add something more?
Sure. Thank you for the question, and Rohit, you've outlined it. From our perspective, the growth obviously has two components to it, from let's look at markets and let's look at the segments. If you look at the markets, primary good part of the growth in manufacturing today is being driven by Americas and EU, in terms of the opportunities that are coming. The areas Rohit has already outlined, primarily auto, which is our strong segment, partnered with industrial and Aero and Defense, but also the function of all investments we've done. We've invested in building a solution, and our engineering services, as you know, is a critical player in driving the growth, the IES capability and the digital capability that we've added.
In both of these, the segments that we've invested in for electrification and in industry cloud with hyperscaler, a couple of them, I think is what gives us a little more bullish impact of where we think manufacturing growth will sustain. The pipeline also is quite robust, and I think we will start to see, even though the conditions overall are epic, we will see growth in manufacturing.
Just to wrap it up on that. We're not seeing too much impact of any cut in discretionary spends in the manufacturing space. Is that what we can conclude? Do you think they are being more than mitigated by the kind of catch-up spend that the industry has to do?
Yeah, I think in this case, our work profile defines where the growth is coming from. Especially, as you know, on the auto sector, both on EV as well as on some of the platforms we have created, right? The warranties and some of the other solution platforms we've talked about, are becoming critical for the demand to be fulfilled in the auto sector. That's though in discretionary spend, there is not much cut there. In the auto segment, at least we have that strength coming together.
Thank you, Mr. Singhal. The question has joined the queue for any follow-ups, as we have several participants waiting for their turn. Also, ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your question to one per participant. If time permits, you may join the queue to follow up. The next question is on the line of Gaurav from Morgan Stanley. Please go ahead.
Hey, thanks for taking my question. I have two of them. The first, how should one look at outlook for second half in respect to the deal wins that you had? Like, the trailing 12-month deal wins is down by 25%. Keeping that in mind, how do you see your second half playing out? What are the areas that is giving you confidence? Second is on areas of business that are actually positively exposed to generative AI versus the ones that could be negatively impacted due to discretionary pressures. How are we preparing for this? Lastly, within top 11-20 accounts, it looks like a significant decline. Anything going on there? Thank you.
I think it's a good question. Let's look at it a few different ways of looking at it. Clearly, there is a not only an introspection, but it is also time to act. As I said, the company has a definitive plan on looking at how to, you know, stop looking back, but to look forward and look at all the three vectors that will help us improve our response to the market. Number one is, you know, being able to look at all the technology investments and also look at all the reskilling, upgrading our own people, or creating, you know, using this opportunity to take a few tough calls. For example, our on-site offshore ratios, our subcon hiring, you know, generalization. That is one which I'd say, which is a easier playbook, but important focus is execution.
The second part is on the growth vectors. I mean, I think it is, two parts to growth vectors. Number one is on the deal flow. Be a little more realistic about the closer dates, because customers obviously are, you know, in different segments, reacting differently to the cost transformation or business transformation proposal. If we are more realistic with our closing dates, I think we will be able to prioritize a lot better. Number third, in terms of increasing our account penetration, account reach, or to, you know, by get better engaged with the top 200 accounts, I think we're doing a reasonably good job. It's just a question of, you know, how to recalibrate ourselves during the headwinds. Obviously, what I'm trying to say is, when you can't score runs by sixes or deliver bigger deals, then go for singles.
Those are the strategic changes that we need to make. Overall, I am confident that this was a tough quarter, but it is also a tough wake-up call, that we need to be a lot more quicker, agile, and we need to re-adopt our strategy for each of our customer success officers and each of our large deal programs.
Thank you. The next question is from the line of Sudheer Guntupalli from Kotak Mahindra AMC. Please go ahead.
Yeah. Rohit, is it possible to quantify the revenue impact of the client bankruptcy event in this quarter?
Broadly, for revenue impact, in this year is probably none. But when you look at year-on-year quarterly, it's around a run rate of $6 million-$7 million.
Okay. On a sequential basis, you had a hit of $6 million-$7 million because of this event?
Q4 versus Q1, yes.
Okay. Okay. Is the wage hike impact taken in the quarter, partially or at least, or that is still pending?
Majority of the wage inflation is already done in Q1, only for certain senior proportion of the employee base. It will happen in the following quarters.
Got it, Rohit. Last question: in a quarter like this, obviously one would have expected the company to dial down on costs, but your sales and support headcount seem to have increased by almost 200 people. So, is it sales-driven investments that you are upfronting, or are there is some element of support staff addition here?
That's part of our leadership program hiring that we do from campuses. It's random exercises. It's more driven by that.
Okay. Okay, thanks. That's it from us.
Thank you. The next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.
Yeah, thanks for the opportunity. In terms of, if you look at your headcount, there's a 10% reduction over the last three quarters, but our employee costs seem to have gone higher. Is it that the cuts happened more towards the end of the quarter, this quarter? What is driving this?
Yeah. you know, when you look at two, three aspects, when you look at year-on-year or last year, while the headcounts were all down, but when you look at increases, the increments happen more towards Q2. Last year, in the baseline, you don't have that impact. This year's increase, we've done it for majority of the population, we've done it effective April. You have a double impact there, from a wage inflation perspective, right? That's causing an offset, in a way, to the correlation to the headcount reduction. For the quarter, QoQ movement, while the reduction has happened in IT of approximately 2,000 people, yet from a timing perspective, it's more towards the second half as well. That will show us the full quarter impact as in this case.
I think also what we've done as part of the strategy, articulated that we continue to reduce subcon. Wherever we have the skills that we've been working on upfronting, we replace those subcon resources with full-time headcount. That is also reflected since it's mostly onsite.
Thank you, Mr. Mehta. We request you to join the Q for any follow-ups. The next question is from the line of Rishi Jhunjhunwala from IIFL Institutional Equities. Please go ahead.
Yeah, thanks for the opportunity. Just wanted to get some more, you know, color on, you know, our expectation of margin recovery over the next 12, 15 months. Especially if you look at from a headcount expense perspective, we are currently operating at 87% utilization. Have seen a 10% headcount reduction in the last two quarters. Our offshore mix also is pretty much at an all-time high. On the fixed side, you know, we are also talking about subcontracting, which would mean that subcontractors have to be replaced by, you know, permanent employees. Effectively, if we have any sort of growth coming back over the next 12 months, then our headcount growth has to be faster than, you know, revenue growth.
Just trying to understand, I mean, you know, some of the levers that you talked about in terms of recovery beyond, say, the current dip that we have, what exactly, you know, will drive that specifically?
Yeah. Rishi, few areas and, you know, maybe I'll start with subcon that you mentioned. The two, three areas within the subcon also, right? While in some cases, you know, you'll end up replacing subcon with a full-time headcount. But when you compare cost to cost basis, there is a differential easily of around 25% there, right? Typically, you would say, 4% reduction there will, you know, to reach 1% overall impact, right, on margin standpoint. That's one kind of direct-to-direct replacement if you do. Second is, even within the subcon topic, there's a lot of opportunity from a vendor perspective that we continuously work on to see how do we rationalize and optimize the scale benefit at a company level.
Those are multiple productivity initiatives that we will continue to drive for overall performance, and given the quantum is pretty large, right? When you look at from a company perspective, 14% from an annual basis, you're talking about $800 million plus spend. When you look at, leveraging the scale benefit, there's a lot of productivity opportunities that we can drive there, right? That's the second that we continue to work on. Then some other perspectives of margin improvement, while the utilization, you know, is high, we still feel from an offshoring perspective, we have a better, still 3%-4% more headroom to get better on offshoring versus where we are today. That should give us significant benefits.
Juniorization, when we look at the employee base today versus how much pressures we have in the system and how we can drive that go forward, there's an opportunity that, you know, in medium term, we can get better on. Those are some of the levers that we can, you know, continue to work on. As I mentioned before, you know, one of the areas that we, you know, look at from a large perspective, getting into more maturity stage and execution tightening there in line with the planned view. I think that will also help us improve profitability as we drive more productivity in this project.
Those are some of the levers that we will continue to drive as we move forward, including rationalization, a fix/cure or divesting of certain business, which we don't feel is long-term strategic or giving the value that we need.
Thank you. The next question is from the line of Girish Pai from Nirmal Bang Equities. Please go ahead.
Yeah, thanks for the opportunity. The second half recovery is based on the existing TCV, or are you expecting any significant TCV expansion to happen from 2Q onwards? That's question number one. Second, one of your larger peers talked about spend shifting away from 5G in the telco space. Is that what you're seeing on the ground? What does that mean for the investment that you made in the 5G space?
Yeah. Manish, you want to come first?
Yeah, absolutely. No, I think I mentioned that there is a reprioritization happening in the industry from a digital standpoint. The digital in telco parlance answers to everything from 5G to their customer experience platforms, to the core BSS and others. That is happening because they are clearly looking at where do they get a better bang for the buck from a short term in terms of if it's the U.S., then it is about a better conversion on the wireless consumer base. In parts of Europe, they are looking to shore up their enterprise businesses. Clearly, as now we all have seen, the enterprise use cases and revenues from the 5G has really not, or is going to take longer than probably anticipated. That I think is indeed true.
I guess we are observing the same pattern, but clearly, the reprioritization is underway. That said, I don't think our investments are in any kind of a jeopardy. All of them, both on the devices as well as on the network, or for that matter, on our software platform side, all continue to do very well. I think they will come, you know, continue to serve us well in time to come as we go forward. I don't think we are worried about that aspect as far as our portfolio is concerned.
Thank you. The next question is from the line of Manik Taneja from Axis Capital. Please go ahead.
Hi, thank you for the opportunity. Just wanted to understand, the way our revenues in Europe and RoW essentially have declined sequentially, as well as the decline in terms of active clients. If you could talk about what's driving that? The second question was with regards to the comments that management had made after Q4 results, that FY24 will be a very strong year for deal closures, g iven what we've seen in Q1, how should we be thinking about this comment going forward?
Yeah. Manik, on deal closures first, I think we articulated that our first half would be tough given the macro environment and the situation. We'd always maintained that first half will be tough and second half will be a recovery. It will be a mirror opposite view of the last year, where the first half was okay, and second half started getting tougher, right? I think that's what we said, and what it's turning out to be is that plus even a little bit worse than that view, and that's why you see the current quarter. I think that's been consistent from that perspective.
In terms of, you know, the other question you had on number of active clients, I think that's more driven by the reporting guidelines we follow on threshold of revenue in the quarter and the last 12 months. This is that, the bottom 40 odd clients sell off that threshold requirement, and that's purely a tail change from a quarter-over-quarter perspective, nothing more than that. I think you had one more question. Sorry, Manik.
The other question was, there's actually a sequential drop that we've seen in Europe and RoW as compared to North America holding up quite well. If you could help us understand how the two sides of the business, the enterprise and accounts would have performed across each geographies?
RoW is partially driven by the Comviva seasonality and certain closures in projects that happened in network services with one of our customers there. We'll be working on a lab project with them. That drove the RoW to decline sequentially. From a Europe perspective, again, the decline in communication vertical, which is more around the Leadcom as you see network services, where there were project closures versus Q4, that led to the decline there. In general, certain discretionary spend cut with the telcos that Manish mentioned, overall more aggravated in Europe this time than we were previously back Q4.
Thank you. The next question is from the line of Mukul Garg from Motilal Oswal. Please go ahead.
Yeah, thanks. I have two questions, one for Rohit and one for Manish. Rohit, first of all, just clarification, if you can help break out the impact on margins from wage hike this quarter. Secondly, all the steps which you articulated about the impact, you know, the steps to improve profitability, generalization, offshore and subcon reduction, won't that be pretty deflationary on revenues going forward? You know, how should we see the how you're looking to replace the impact on growth, you know, from maybe billing impact? Manish, on the, you know, on the communication side, is it possible to give some color on the areas which were impacted?
You know, if you look at BPO business grew this quarter, the impact was pretty much on the IT side. Was that network services or, you know, on the IT which got hit? We have seen commentaries from a lot of telecom equipment guys being fairly negative on spend. If you can just give us a color on what is driving this decline.
Yeah. maybe, Manish, why don't you take the communication, answer first, and then I'll talk about the other point.
Sure, sure. Mukul, I think the look, we partially answered it earlier, both Rohit and I, but just to be more clearer and specific, one is there is the cyclicality that happens to our Comviva business. Second, a pretty significant impact that happened from a project that closed in the network space in RoW. It is not that positive surprise, just that in Q4, we did significant amount of work little ahead of time, which I think was positive. From an overall spend and where the pressure points are, it is both in the network as well as in the IT space.
IT is largely coming because some of the digital transformation work that had started three, four years ago, either they have come to closure, and as we speak from the new projects that they were about to award, they have pushed these decisions forward as they reprioritize these things. So I think this coming in from both the network as well as from an IT transformation standpoint. Does that answer your question?
Sure.
Yeah. Just to clarify, your questions were one on incremental impact for the quarter, and then second, the margin levers for the rest of the year, how much of that is driven by growth or spend there in it?
Yeah. The second question was that most of the margin levers we are contemplating, they tend to be deflationary on growth. Is that the way we should look at it?
Yeah. Okay. First, from an incremental impact perspective, for the quarter, we, as I mentioned, we did increment most populations. The impact was closer to 1.3% in terms of margins. There is certain sides on the population which the increment will happen in Q2. That's a smaller impact. That's in terms of annual increments. In terms of the margin levers that I spoke about, right? If you kind of look at that sub con substitution or improvement on scale or other productivity benefits, there really is a lever which is kind of, you know, independent from a growth perspective.
Um, if you look at, uh, how we drive that, and even if you look at last three quarters, while growth has been stagnant or down, we've been able to drive, uh, reduction in the subcon cost dramatically. So I think that we will continue to drive. And similarly, the other areas also, which I mentioned, um, maybe except a little bit of, uh, view on juniorization, which probably needs to be supplemented with, uh, growth and, uh, the recovery in the second half as we look at it. Uh, the rest can be, uh, worked on as purely productivity measures that can help us as we, uh, think about margin expansion.
Thank you. The next question is from the line of Ashish Aggarwal from Sundaram Mutual Fund. Please go ahead.
Thanks. Most of my questions have been answered. Just wanted to understand one thing, and as the management actually said, that this was a perfect storm. If you look at last six or seven years, we have three or four times where we have seen a double-digit EBITDA decline on a sequential basis, on a Q1, Q2 basis. How should we look at Tech Mahindra going forward as an investor? Given our portfolio of businesses, given our nature of business, do we see this volatility continuing over a longer term, or do you think what steps we need to take to make it a, let's say, a predictable or a boring organization going forward?
I like the word boring organization. I think, when we last met during Investor Day in early April, right, we had said these are the four things that we will do. Number one, bring in an extraordinary focus on a few geographies, which include the U.S. Number two, we said, we will gRoW insurance, vehicles, manufacturing, and health services a little more than the other industry verticals. Number three, we said we will look at co-creation with some of our customers. We look at potential joint ventures with them to develop new service offerings or new initiatives. Number four, we had said, we will be looking at reselling some of our service offerings as platforms.
I think we want to stay on this trajectory, and obviously there is a need for us to become a lot more simplified as a structure. Number two, there is a need for us to be a little more agile in terms of the way we run our own internal operations. Number three, we probably need to permanently co-correct our pyramid. I mean, I know that Rohit is a little hesitant on being prescriptive right now, but he and I have been discussing it for the last five, six weeks. Generally, the direction that we have committed to you during Investor Day, we just need to get into that formula that I think, I don't remember whether it was Rohit or Manish who had said, "We know what we need to do.
We just now have to get in to execute, and execute." I'm gonna repeat that. I don't know who the original author on that Investor Day of execute, execute was, and since Manish, I'm willing to give you credit, let's get down to execute, execute.
Noted, CP. Absolutely.
Thank you. The next question is from the line of Mihir Manohar from Carnelian Asset Management. Please go ahead.
Hi. Thanks for giving the opportunity, congratulations to Mohit on joining Tech M. Largely two questions. I mean, first thing on the provision side, I mean, pertaining to the bankruptcy. Are there any more provisions going to come, or have you provided fully whatever was there on the balance sheet? Have we also considered the unbilled revenue part of it? Just wanted to get a clarity on the provision part. My second question was just on the BFSI side of the thing. I mean, when we see over 40% of our business is largely coming from the CME vertical. Now, fundamentally, the business itself, I mean, the global telcos have been challenging over the last four or five years. What is the end of the current BFSI business, which is there?
It is more on the Asian banks side. Just wanted to get an understanding. I mean, will U.S. BFSI be an important part of our strategy? Any color around that will be helpful.
Yeah, sure. Maybe first on the provision side, we've covered, on this case, we've covered all the risks that we have, both unbilled, billed, everything. That's being taken care of. In terms of BFSI, yes, U.S. will gonna be a significant part of our strategy. It's a big opportunity. As we kind of look at our portfolio from the past, where we were to where we are now, you know, BSS size more than 15% of our overall revenue base, we've grown it from where we are to now. We've identified significant gaps, both geographically as well as within the BSS side, where we don't play today. I think there's a clear articulation of that strategy internally.
I think the focus will be for us to continue to drive those gaps of improvement, including a big focus in America as we move forward from a BSS standpoint.
Thank you. The next question is from the line of Abhishek Kumar from JM Financial. Please go ahead.
Hi, thanks for taking my question. Question to Manish. Manish, you had said that there were cost take out deals that were in discussion and probably towards the middle of the year, those can classify. Just wanted to understand, you know, how those have moved, you know, are we any closer to closing some of those deals? How would that change, you know, the growth trajectory in telecom, if at all, you know, towards the latter half of, you know, this year? Thank you.
Of course, Abhishek. I think the deals are still in play. We're still in discussions at various stages. Some of these are, as I said earlier, have been pushed out because they're evaluating all other options as well. Clearly, from a vendor consolidation, cost take out, reformatting how their tech workforce needs to be architected, all those discussions are underway at this point, and they are all in the realm of at various levels of maturity, they are in the funnel at this point. Over the next two to three quarters, some of these deals will indeed impact the group.
Thank you. The next question is from the line of Dipesh Mehta from Emkay Global. Please go ahead.
Thanks for the opportunity. Two questions. First, just want to understand CME. If you can provide some detail on sub-segments, where we are seeing more weakness, and how you expect that to play out over the next few quarters? Second question is about top 10 client performance. If you look top 10 client, fairly resilient, whereas CME is very weak. Typically, CME used to have a higher client concentration, and some of the clients were part of our top 10. If you can provide some more details about divergent trend between these two things.
Yes, maybe I'll answer the second one first, and then maybe Manish can weave favor on your first question.
Sure.
On the second one, you know, with the top 10, we've been seeing, as we'd articulated before, we were seeing some pressure in what? A couple of our top customers in the last couple of quarters, and that we have said is getting closer towards the bottom out phase. That's happened, and we're seeing some positive momentum there. The closure of the projects that we mentioned in network services within CME, were more outside the top 10 customers. One probably closer to the top 20, and the other one was below that.
I think that's what is causing a reduction there, which is leading to the decrease, and then overall discretionary spend cut across the board beyond these couple of project closures, which have one-time impact, which is why we don't see that in the top 10. There, it's more stabilized now, right? We see more resilience there. Maybe, Manish, you can take up the earlier part of the question.
Sure, sure. Yeah, Dipesh, you know, tactically speaking, while there are different customers, who are at different point in time in terms of their transformation journey, we have some projects for some people are still behind the curve, some have completed, and some are in the advanced stages. That, I think, is too detailed a question to be able to articulate in a short while. To answer your question, most of the trends that we see in terms of discretionary digital transformation spend, as well as the cost transformation, they are pretty uniform across the major Tier One operators across the world.
That said, while we are very well placed with many of these companies to continue to take advantage of their initiatives, you know, notwithstanding the fact that we probably will go through some of these headwind days and quarters. The other aspect that played out this quarter, like we said, both Rohit and I articulated, was a couple of one-times technical issues that are part of our businesses. Hopefully, we'll be seeing all these behind us as we go forward from here on.
To maybe provide a little bit more comprehensivity to your as a response to your question, I want to reiterate that the two areas where we saw a significant pushback was one is in the IT digital domain, and the other was in the network services, where some of the reprioritizations have happened. Geographically, I think it is pretty uniform at this point. I hope this was pretty elaborate for you.
Thank you. The next question is from the line of Abhishek Shindadkar from InCred Capital. Please go ahead.
Hi, thank you for the opportunity, and welcome, Mr. Joshi. I have two questions, one for Manish. The first one is on, you know, last quarter, we were saying of, you know, spends related to 5G, so on and so forth. Also, you know, some of the deals got pushed off, and maybe, you know, they could come into queue. If you can elaborate, you mentioned, you know, we heard you about challenges, but anything specific that played out, you know, especially related to 5G? That is what I wanted to understand. The second question is on, you know, for Rohit, on, you know, margins. Based on the portfolio we have today, can we assume that we have reached the bottom of the margins?
A subpart to it is, you mentioned that the subcontracting expenses could be less than 10% of the revenue. Is that the priority for current year, or, you know, is it a priority over the next 12, 18 months? Thank you.
Yeah. Manish, can you take a question for us?
Yeah.
Take the margin.
Absolutely. I think I addressed the 5G question earlier in terms of the watchfulness that has gotten into the mix of decision-making as far as the 5G spend is concerned, which is part of the overall digital transformation spend. I don't think I can add any more color to that, you know, that question. That said, the As we go forward, what we are seeing is that there will be a very clear focus and I'm sorry, let me answer the other part of your question first, which is what happened, particularly this quarter, in terms of some of the decisions that got pushed out. One is the enterprise part of some of the major telcos businesses.
We were expecting some of these deals to come through, both in Europe as well as in the U.S. These decisions have been pushed out because their enterprise business is going through a lot of organizational changes as we speak. These are specific to a couple of customers, but they are significant in terms of both our portfolio as well as the impact that they have on the enterprise businesses and the industry as a whole. These things have been pushed out. Some of their decisions in terms of digital transformation and cost takeout have been pushed out. That clearly was part of the surprise element that happened.
How that pans out over the next few quarters remains to be seen, but we continue to remain in a dialogue, with each of these customers as we go forward. Broadly, I think I've already adhered in terms of what areas I've seen slow down in spend and what areas will continue to remain pretty important as far as spend is concerned going forward. I'll just want to repeat that digital transformation is not something that we are stopping. We are just reprioritizing the various areas we want to focus on versus, what we are doing today. That clarity, as it emerges, clearly will lead to a lot of decisions that will start happening in the second part of the year.
Thank you.
On the margin question, you know, from a subcon standpoint, I think it's actually added for the last three, four quarters. As a percentage of revenue, it's dropped from 16%- 14%. We see that benefit for the last three quarters in terms of margin of subcontracting reduction. We'll continue to drive that sequentially for the next three quarters.
Sorry, your voice is not very audible. Please, can you come closer?
Yeah. Is it better now?
Yes.
On the subcon, I was saying that we've reduced that from 16%-14% over the last three, four quarters, and we'll continue to work on it. As we'd articulated, our entitlement mark is getting to 10% and below, we will continuously drive that in the next few quarters to get to that level and see that opportunity flow through from a benefit standpoint over the next three, four quarters.
Thank you.
Rohit, if I may just add, sorry, just one more thing. But while we have had this challenging quarter, I hope we appreciate that this is at the back of 12 quarter-over-quarter successful growth quarters that we have seen. The reason I'm highlighting that is just to acknowledge not just the support from all of you, but also from both our customers and our teams and partners, who continue to put in that and believe that this business and the leadership position that we have in this industry is something that we are very confident will continue to serve as a great foundation. As the industry, per se, transforms and comes back into a growth mode, I think our company is in a pretty good position to take advantage of it.
Thank you. The next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.
Hi, good evening. Thank you for taking my question. I had just one question, more on the margin side. The kind of revenue decline which we have seen would have started at the beginning of the quarter itself and Comviva season might be something which is quite well known. We don't see any cost intervention taken during the quarter to manage the margin. The revenue decline is largely understandable. Most of the peers have also seen. During the quarter, we have seen, undertook the wage hike of full impact. We went ahead hiring the fleet and support staff. I have seen the costs have also increased during the quarter. Why was no intervention taken to manage the cost? What is giving us the confidence that now this is the bottom, and we should see a recovery from here on?
The levers which you have highlighted are largely the same, which you have talked about earlier as well.
Yeah, yeah. I think just from an action perspective, managing cost action did happen. Just when you look at the revenue drop, right, the revenue drop has been, some of it is what we planned, right? Like on people seasonality and some of the project closures that we envisioned. You know, the backfill of that from new deals or discretionary spends that got reduced or more than anticipated as we move more towards the later half of quarter, right? Some, some of it is well known, and some of it gradually happens in the quarter. What action did take, because you see the IT headcount, that's down 2,000 quarter-over-quarter. It's more driven towards the later half of the quarter, and we continue to action as we move forward, right?
So that is work in progress. In terms of sales and support account, as I've articulated, those are campus hires for the leadership program that we have, which we continue to support on those campuses. Drive sustainable year-on-year program, right? Backing that off from a campus culturally or what we, you know, kind of, signify doesn't make sense, right? That's what we continue on, instead of backing away from that, right. That's what the increase you see, it's not adding the sales headcount, et cetera, right, given the declining business.
All right. Thank you. That's it from my end.
Thank you. The next question is from the line of Samir from ICICI Prudential AMC. Please go ahead. Samir, your line is unmuted for question. Please go ahead.
Yeah, thanks for the opportunity. Am I audible?
You're audible now. Yeah.
Yeah. If you think about, you know, an environment which we are currently in right now, you know, the, you know, the ability to monetize some of your levers, you know, like last two quarters, we have been able to bring down subcon from 16%- 14%. Now you are headed to 10%. How should we think about the pace of monetizing these levers, especially in an environment where we are facing a lot of headwinds in terms of discretionary cut? That is 1 point. How does that change our margin goal that we have set up in the analyst day that we have spoken about? That is first question.
The second is that, you know, in an environment like this, there are a lot of these short-term projects that, you know, are getting roped off, and there is a lot of discretionary cut. Last six months, TCV generally decides, you know, the revenue trajectory, which has been weaker for us. What gives you confidence, you know, that the growth may come back or, you know, this is kind of the bottom in terms of performance? Thanks. Thanks for the opportunity.
Samir, let me answer this with two broader strokes. One is, what I told my team is, if you can't go for the six runs, go for a singles. Effectively, what it means is that sometimes when you go back to the basics with all your accounts, and you are better prepared to listen to them for those smaller, transformative Gen AI kind of deals, I mean, it also all of that adds up. That's number one. Number two, for the cost transformation, I think, I mean, I would rather take a medium-term outlook than a very short-term outlook. Short-term outlook is very simple. Cut a few layers and, you know, you can rightsize it almost on an urgency.
If I take, which is what I want to propose to Mohit and Rohit, both, Mohit Joshi and Rohit Anand, is that, if we take a medium-term outlook, what will happen is that, A, as I said, I would go more aggressive on investing in the young talent. That means we invested last year in tier two cities. Why not take a target of 25,000 people in the tier two cities in the young talent? Now, that 25,000 people will become productive in the next maybe six to eight months. I'm just giving a projection. I'm not saying we've taken a decision here, but I'm just wanting to re-amplify the word medium-term.
As far as my existing staff, if I reskill them fast enough, and if I focus on those short-term projects, I think I'll be able to optimize it, both the market demand as well as the needs of my employees. For a medium term, I have no choice but to correct the pyramid, and for that, I have to take one shot at investing so that we permanently correct the pyramid. Otherwise, we have a challenge in our T&B costs compared to others in the industry, and the only reason we have the T&B challenge is three factors: on-site, offshore ratios, number two, subcons, and number three, juniorization.
Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference back to the management for the closing comments. Thank you. Over to you.
Thank you, everybody. As I said, you know, we all know that we have faced one of our toughest quarters, but overall, I want to reemphasize Tech Mahindra is positive about its own outlook. We as a team have gone through some of these challenges in the past, and we will rally together. As you know, committed by, you know, many of my management team members here today, we will start improving our performance as we go along. The magic word is the same three words that I started the call with: execute, execute. Thank you, everybody. Thank you for your support, and I need more support as the team repurposes and gets into the recovery phase. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of Tech Mahindra Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.