Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Firstsource Solutions Ltd (BOM:532809, Financial) achieved its highest quarterly revenues ever, with a 17.1% year-on-year growth in INR terms and 15.4% in USD terms.
- The company won three large deals in Q1 FY25, marking a significant milestone.
- Healthcare vertical showed strong performance with a 15% quarter-on-quarter and 26% year-on-year growth in constant currency terms.
- The company added 10 new logos during the quarter, expanding its client base.
- Firstsource Solutions Ltd (BOM:532809) has successfully integrated QBSS, leading to joint deal wins and enhanced service offerings.
Negative Points
- EBIT margin for the quarter was 11%, which is stable quarter-on-quarter but lower by 70 basis points compared to Q1 of the previous year.
- The CMT vertical showed flat quarter-on-quarter growth in constant currency terms, with some optical headwinds due to onshore to offshore shifts.
- Europe saw a 3% quarter-on-quarter decline in revenues due to quarterly volatility and planned on-site to offshore shifts.
- The company's net debt increased to INR9.7 billion as of June 30, 2024, from INR6 billion as of March 31, 2024, due to higher working capital requirements and acquisition costs.
- Trailing 12-month attrition rate stood at 32%, which, although improved from previous quarters, remains relatively high.
Q & A Highlights
Q: The CMT vertical showed some weakness due to the on-site to offshore shift for the top client. What is the outlook for this client and the vertical overall? Is the shift complete, or will it continue in the coming quarters?
A: While we continue to engage actively with all our large clients in this vertical, the transition from on-site to offshore is happening in phases, which may cause some quarter-on-quarter volatility. However, on a full-year basis, it aligns with our estimates and guidance. The CMT vertical's overall pipeline remains robust, with traction in telecom, digital media, EdTech, and consumer tech subsegments.
Q: The healthcare vertical saw a sharp revenue jump due to QBSS and deal ramp-ups. Is the initial ramp-up complete, and can we expect a normalized run rate? Will the healthcare vertical grow above the company average for FY25?
A: We expect the healthcare vertical to grow above the company average for the year, driven largely by the payer segment. The growth is broad-based across various clients, not just one. The ramp-up continues in phases, and we see a strong pipeline in the payer segment. The provider side is also expanding, especially with the QBSS acquisition, which enhances our end-to-end RCM capabilities.
Q: Given the strong Q1 performance, why is the guidance for the next three quarters conservative?
A: Our guidance is based on our current line of sight for FY25. While we are confident in our revamped go-to-market strategy and execution rigor, the guidance band considers multiple variables, including pipeline conversion and deal ramp-up pace. We raised the lower end of our guidance from 10%-13% to 11.5%-13.5% based on our strong Q1 performance.
Q: How should we view the offshore revenue mix and its impact on margins?
A: The offshore delivery mix has increased from 25-75 to 35-65 over the last four quarters. We aim to continue this trend, as offshore delivery generally comes at a higher margin than onshore. However, we are balancing this with investments in the business to support growth and build a resilient, durable business.
Q: Can you break down the growth in the healthcare vertical between organic and inorganic contributions?
A: About 2% of the overall growth for the quarter came from QBSS. We are not breaking down the payer-provider mix as we see a convergence in capabilities. The focus is on integrated offerings that leverage both payer and provider strengths.
Q: What is the impact of AI on client expectations for productivity and cost?
A: Clients are increasingly interested in AI for revenue growth, cost optimization, and process transformation. While AI may cannibalize some lower-end BPO services, it also opens new business opportunities. We are seeing innovative commercial constructs and sole-source opportunities, allowing us to reduce the total cost of ownership for clients.
Q: What is the outlook for net debt reduction and becoming a net cash company?
A: We expect to generate $10 million to $12 million in extra cash each quarter, which will be used to repay borrowings. Based on this, we could become a net cash company in six to eight quarters.
Q: How much of the headcount addition in Q1 was due to the QBSS acquisition?
A: The headcount addition includes both linear and nonlinear work. QBSS has tech capabilities that allow for minimal human intervention, contributing to the headcount. We are also focusing on reducing linearity in our business.
Q: What is the potential upper ceiling for the offshore revenue mix?
A: While it's hard to specify an exact number, we aim to continue increasing the offshore revenue mix. This trend will continue, but the exact ceiling and timeline are difficult to predict.
Q: How does the company plan to achieve the $1 billion revenue run rate by Q4 FY26?
A: We are focused on leveraging our strong foundation, revamping our sales engine, and making strategic investments. We expect broad-based growth across verticals and geographies, supported by a strong deal pipeline and leadership rebuild.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
