Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Mphasis Ltd (NSE:MPHASIS, Financial) reported a strong pipeline growth, with an overall increase of 22% year over year and 17% sequentially.
- The company launched two new platforms, Mphasis NeoZeta and Mphasis NeoCrux, aimed at transforming legacy applications and improving software engineering productivity.
- Mphasis Ltd (NSE:MPHASIS) recorded healthy TCV closures in Q1 at $319 million, with broad-based wins across verticals and client segments.
- The company saw sequential growth in its BFS segment for two consecutive quarters, indicating a recovery in this key vertical.
- Mphasis Ltd (NSE:MPHASIS) maintained a stable EBIT margin of 15%, despite acquisition costs impacting margins by 0.8%.
Negative Points
- The company's Q1 revenue growth was modest at 3.1% YoY in constant currency terms, with a slight decline of 0.1% sequentially.
- Top 10 accounts declined by 10.1% on a year-over-year basis, impacted by macroeconomic factors and regional banking issues.
- The BPO segment saw a sequential decline of 2.1%, attributed to project completions and ramp-up of new projects.
- The healthcare vertical experienced a decline due to project completions, impacting the overall 'Others' segment.
- Despite a strong pipeline, the conversion from TCV to revenue has been slow, affecting immediate revenue growth.
Q & A Highlights
Q: What has been your experience with cost savings for clients across application services, people, and infrastructure with GenAI? Do you think deal sizes led by NeoZeta can be large? How is NeoCrux sold, and can productivity benefits be retained long-term?
A: GenAI is transforming services by moving from people-based to software-based solutions, leading to potential volume reductions in service lines like production support and maintenance. NeoZeta and NeoCrux are designed to unlock large modernization deals, not just small applications. NeoCrux is sold as a bundled service offering, aiming to create significant value for customers and potentially achieving nonlinearity in productivity and pricing.
Q: Given the modest performance in the direct business this quarter, should we think of it as a blip on the strategic recovery path, or are there unanticipated headwinds?
A: The direction of travel is positive, with sequential growth in BFS for two quarters. The direct business performance was impacted by project completions in the healthcare vertical, but pipeline and TCV metrics remain strong, indicating a positive trajectory for overall growth.
Q: What gives you confidence in achieving above-industry growth for the full year, given the modest June quarter performance?
A: Confidence comes from visibility into short-term pipeline and lead indicators. Despite modest TCV in previous quarters, the expectation is to deliver healthy TCV and pipeline expansion, supporting above-industry growth for the full year.
Q: Is the first half deal TCV of FY24 fully converted into revenue, and will new deal wins trigger growth in the coming quarters?
A: The $1.4 billion in deals from FY24 is not fully ramped up, with more to come in FY25. The pace of ramp-ups has improved, and new deal wins will contribute to growth in the coming quarters.
Q: What are the client expectations and productivity improvements with GenAI across segments? Can you provide more details on the early signs of pickup in the mortgage business?
A: GenAI can deliver 20-30% productivity improvements depending on the use case. Early signs of pickup in the mortgage business are seen in origination volumes, but significant gains depend on macroeconomic factors like interest rates. The mortgage business is expected to recover as market conditions improve.
Q: How should we think about the on-site, offshore mix, especially given the increase in on-site revenue mix over the last 12 months?
A: The on-site, offshore ratio is an outcome of the type of deals and work being delivered. The focus is on profitability and delivering services from the best shore, whether on-site, nearshore, or offshore. The increase in on-site mix is due to early-phase design and architecture work in transformation deals.
Q: What are your thoughts on the total incremental IT services spend of BFSI or non-BFSI customers in 2024?
A: The total IT services spend projection for 2024 is about 2.5% globally. This indicates opportunities for market share and wallet share gains, especially with market-leading solutions in areas like modernization.
Q: Are GCCs (Global Capability Centers) a more structural problem now compared to the past?
A: GCCs are here to stay and are an integral part of customers' operations. The industry has learned to thrive alongside GCCs by offering more than just offshore delivery capabilities, focusing on differentiated solutions and value creation.
Q: Given the decline in the healthcare segment, do you see deal wins ramping up immediately, and are there any other large project closures to worry about?
A: Sequential growth in the healthcare business is expected based on recent deal wins and pipeline activity. The focus is on building longer-term sustainable programs, and no other large project closures are anticipated in the near term.
Q: What was the reason for the decline in depreciation this quarter, and is this the run rate going forward?
A: The decline in depreciation was due to the completion of amortizations from previous acquisitions. The current run rate is expected to be the normalized level going forward.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
