- 2 years ago
Mphasis' profit dipped marginally to Rs 392 crore while margins expanded.
CEO Nitin Rakesh & CFO Manish Dugar decode Q2 earnings report. #BQLive
CEO Nitin Rakesh & CFO Manish Dugar decode Q2 earnings report. #BQLive
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NewsTranscript
00:00 Thanks so much for tuning into this earnings conversation with Emphasis.
00:03 IT has been a difficult sector to track this quarter.
00:07 There are a remote few companies which have posted very strong numbers relative to what
00:12 was estimated and there are a few which have disappointed.
00:15 And then there are a few like Emphasis which has come out with a flattish quarter because
00:18 of opposing forces at play.
00:19 Let me get in the management to try and tell us what went in the half or in the quarter
00:24 in the first half and what does this mean for the full year.
00:29 Nitin Rakesh, Manish Duggar joining.
00:30 Gentlemen, thanks for taking the time out.
00:32 What went behind the quarter, Nitin?
00:35 I think as you pointed out, Neeraj, there are countervailing forces at play.
00:41 I think there are some segments of the business that still continue to face the macro-driven
00:44 headwinds.
00:46 We've had a mixed bag over the last couple of quarters.
00:50 We had record TCV wins last quarter.
00:51 First half of the year, we are up almost 60% YOY in terms of our TCV wins.
00:57 So the pipeline, creation, closure definitely seems to have improved over the last couple
01:02 of quarters.
01:03 Revenue conversion still lagging behind where we think it needs to be.
01:08 So that's one thing to think about.
01:09 Second, I think BFS macro headwind still continues to persist both in terms of an overhang from
01:15 the regional banking crisis as well as tightening of discussionary spans with an expectation
01:20 that the interest rate environment will lead to a worsening consumer environment in the
01:25 U.S. at least.
01:26 So that segment has been also challenging.
01:28 We also had a double whammy effect there over the last few quarters given the exposure we've
01:33 had to the mortgage business over the last four or five quarters that segment was declining.
01:38 We've seen a moderation of that decline over the last two quarters.
01:41 And I think we're at a point where given just our wallet share gains and Autobooks situation,
01:45 we think that's behind us as well.
01:48 The non-BFS business has definitely grown well for us, especially high-tech, travel,
01:54 and healthcare.
01:55 So I think that has definitely made up for whatever headwinds we saw on the other side
02:00 of the other half of the business.
02:01 I think we are pleased with the fact that we've shown sequential growth 0.7%.
02:07 We're also very pleased with the fact that first of all, Autobook is strong.
02:11 And we do believe that the worst seems like it's behind us and we should see uptick in
02:16 growth sequentially, potentially Q3 accelerating into growth in Q4 as we stand.
02:23 Of course, still too much uncertainty out there in the macro environment and the geopolitical
02:27 front as well.
02:28 So it's hard to kind of call a bottom, but we are cautiously optimistic based on purely
02:33 the Autobook as well as the TCB wins that we've had in the last two quarters.
02:37 Nitin, if Jay Powell as well as some of the other influential bankers are to be believed,
02:43 it might need to engineer the recession, if you will, in order to keep inflation lower.
02:47 And if that is the principal target, what does that mean for business?
02:51 Is we waiting for rates to come off for sentiment to improve so on so forth.
02:56 But if it will take an engineer to, you know, it take a recession to get that going, would
03:02 that mean that the other parts of the business get impacted negatively?
03:06 Yeah, I think we are still waiting for the recession, we were promised.
03:11 And the uncertainty is what drives a lot of the pause and creates inaction.
03:16 Once we know that we are in recession, then we know that the beginning of the end is visible.
03:20 So I think the sentiment actually might improve counterintuitively as we actually see that
03:24 happen because, as you know, you know, the both the markets and of course, the buyer
03:28 behavior, you know, starts to think about what happens next, not what we are in today.
03:33 Unfortunately, we are in the same frozen state for the last six quarters, since the first,
03:38 you know, tightening started happening in March of 2022.
03:42 So I think to me, uncertainty was, you know, create creates inaction is kind of the phase
03:46 we need to get out of.
03:48 As I said, instead of waiting for the macro to improve, our focus really has been on a
03:52 bottoms up account by account micro strategy, segment by segment, vertical by vertical,
03:57 geography by geography.
03:58 So I think it's a, we kind of switched into that mode over the last few quarters, because
04:02 we definitely can't control what's going on, you know, outside our control.
04:06 And even the best of the estimates from any economist or central banker are at best, I
04:12 think, a guesstimate.
04:13 So at this point, I'll kind of take a macro call, I think focus more is on what segments
04:19 can we control?
04:20 How can we continue to build business and momentum using wallet share gains and market
04:23 share gains?
04:24 And of course, invest, continue to invest in areas like, you know, the new verticals
04:28 we started, you know, we see it over the last few years, the new account acquisition engine,
04:32 new client acquisition engine, and most importantly, get ability build up using areas like AI.
04:37 And of course, making sure that we are able to expand our editable market using that expansion.
04:41 The good part, Manish, is that the, and for you, it's not been as big a problem as the
04:49 industry, but the talent cost issue, the attrition issue, all of that seems to be behind.
04:56 But there is a need for newer kind of talent for AI fuel growth, so on so forth that Nitin
05:00 was speaking about as well.
05:01 How is that aspect of the business shaping up not just in the quarter, but also for the
05:05 last 12 months?
05:08 So clearly, acquisition of talent is one thing that Nitin talked about, whether it is, you
05:15 know, through partnerships with partners like core and workfusion, or it is through acquisitions
05:22 like silver line that we just did.
05:25 However, you know, even the bigger focus than that has been in creation of our own talent
05:30 using, you know, platform that we have, which is talent next using, you know, our whole
05:37 approach towards compensation, where the GQ score drives the compensation and GQ score
05:42 is essentially how every team member upskill themselves and make sure that they are working
05:48 on projects which are creating more value, both for the client as well as for themselves
05:53 in future projects.
05:54 So I think our dependence on, or our lack of dependence on having to acquire that talent
06:01 from the market also enables us to provide brands with staff with such special skills
06:09 without necessarily having to charge them at, you know, the cost that you would otherwise
06:14 incur if you have to hire them from the market.
06:16 So clearly, the strategy to seed the teams with acquisition and then grow that through
06:23 creation through the platform has been working well for us.
06:30 You are in this aspect of constantly giving quarterly appraisals, if I'm not wrong, because
06:37 you've not timed it to a particular season from what I remember.
06:41 How is that shaping up at this point of time when they may not be as big a need to do that?
06:46 Though, of course, you always want to reward employees, but the attrition numbers have
06:49 come up quite significantly.
06:51 So therefore, the risk of losing employees left right center is kind of coming off a
06:54 little bit.
06:57 So you know, adjusting to the market requirements was required when attrition really went up
07:05 through the roof.
07:06 But that does not mean that the compensation linked to performance and GQ score should
07:12 be, you know, kind of paused or terminated when the market is not that hot, because this
07:18 is not dependent on how the attrition is.
07:21 So I would say that we don't need to now do that special intervention that we were having
07:26 to do when the market was really heated up.
07:30 But anything and everything to do with compensating and rewarding team members as they upskill
07:35 themselves and make themselves more valuable to the organization that continues and that
07:39 should continue.
07:40 Got it.
07:41 Nitin, two part question.
07:44 One that the second one is on inorganic strategy, but the first one is a leaf out of the answer
07:49 that you gave that you are seeing some tough times into two of your key verticals.
07:56 When they recover, does that or would that possibly give you the advantage of having
08:03 not so tough a base to perform upon?
08:07 Yeah, I think, again, you know, pure math basis, what you're saying is right.
08:12 But I think the right thing to think about it is from our perspective, what we watch
08:15 like a hawk is the wallet share in every account, as well as the market share across the segment
08:20 that we play in.
08:21 If you think about banking financial services, we believe we have a right to win in that
08:25 segment.
08:26 We've actually used the last few quarters of macro headwinds to actually strengthen
08:30 our position in many of those accounts, especially the new ones that we opened over the last
08:34 two or three years.
08:35 So as the spend recovers, I think we want to make sure that we continue to play that
08:41 value added service provider challenger role in these accounts where spend pockets are
08:44 large.
08:45 When, you know, competitor displacement is a big opportunity.
08:50 And most importantly, as they start adopting some of the new technologies that we've seen
08:54 emerge over the last few quarters, I think those those spends will definitely help us
08:58 gain a larger share of the wallet.
09:00 So again, I think from a go forward perspective, what will be obviously we want to make sure
09:05 that we've paid the price for cyclical downturn.
09:08 We want to make sure we gain from the upturn as the cycle turns, whenever it turns, it's
09:11 hard to call when, especially in areas that are sensitive to interest rates.
09:15 But more importantly, we want to make sure that we are actually net gainers of all our
09:20 share and market share, because we are very, very focused on on that segment and has been
09:25 one of our oldest business verticals.
09:27 Okay, what about the other aspect inorganic moves?
09:31 Manish referred to silver line as well, but of course, the whole strategy.
09:36 I think if you see, we've had a very disciplined approach over the last five years of capability
09:41 based competency build up through talking acquisitions.
09:43 Our first acquisition was almost five years ago, which was an AWS DevOps design consulting
09:48 firm for banking in the US.
09:51 That kind of became the foundation of a lot of what we do in the in the DevOps tribe,
09:55 as well as in the AWS, you know, and the hyperscaler ecosystem.
09:59 The last one that we've done is silver line, which is a sales for some partner, a 400 plus
10:05 consultants, given the importance of the sales for the ecosystem.
10:09 As you think about the lifecycle of a customer engagement model from most enterprises, I
10:15 think that that ecosystem is starting to gain a lot more traction, especially with playing
10:19 in in customer experience transformation, playing in an ecosystem where you can bundle
10:25 conversational AI with gen AI into the into the CRM led application ecosystem and design
10:33 capability through Blink.
10:34 I think it's a very large opportunity that we think we should be able to monetize on
10:37 as the transformation deals start building up there, especially supersizing those deals,
10:44 you know, using even things like context and transformation is a big play.
10:47 So that's the thesis behind that acquisition.
10:50 It was something that we've been trying to build up organically as well over the last
10:52 few years.
10:53 But this was a great asset with the accretion in capability, leadership, accretive, obviously,
11:00 you know, very strong partner at Salesforce, very deeply embedded with them has a seat
11:04 at the table from a product launch perspective, vertical cloud integration.
11:08 So you know, capability led acquisition, but obviously a lot of a lot of other things that
11:12 come with it, including customers.
11:13 Got it.
11:14 Manish, very quickly, we have 120 seconds.
11:17 So second last question to you 60 second answer.
11:20 What do you feel about the second half?
11:22 Any changes?
11:23 So you haven't been able to look at it, but any changes to the statements that you have
11:27 made about quarter three or the second half?
11:32 So the growth being back ended and second half continues to be the commentary.
11:41 There has been, you know, a delay in conversion of revenue versus what we were expecting,
11:47 which, you know, makes the growth trajectory more fourth quarter than third quarter, however,
11:52 third quarter should be positive.
11:54 As Nitin mentioned, all the businesses are now in the positive zone.
12:00 They have certainly bottomed out and this is not based on macro, but this is based on
12:04 the deal closures and the conversions that we're seeing on ground.
12:08 And from a profitability perspective, we continue to be in that range with a northward bias.
12:13 And as you know, we kind of reported an expanded margin this quarter as well at 15.5%.
12:19 This obviously is excluding what it does, what the acquisition does to the profitability,
12:25 but you know that we will come back to when we get to the next.
12:30 Makes sense.
12:31 And Nitin, one final question.
12:32 I've asked this to every CEO.
12:33 Why is it that the TCVs looked good, but the revenue conversion isn't quite happening?
12:39 Is it because of discretionary going down and the tenor of the deals being long or what
12:42 else?
12:43 I think it's a combination of everything you just said, Neeraj.
12:48 There is a certain degree of discretionary spend cut, shorter duration, short, you know,
12:53 organic deal growth has been tighter.
12:55 Scrutiny and spend has been higher.
12:58 There is a digital dichotomy in play.
13:00 On one hand, you're cutting discretionary spend.
13:01 On the other hand, you're trying to find money to implement, you know, Gen AI and AI solutions.
13:05 So I think that prioritization, reprioritization exercise hasn't really ended all year.
13:10 We've seen some clients that have actually been on a monthly budgeting cycle despite
13:14 having a budget for the year when they started the year.
13:15 So uncertainty creating inactions, definitely making that harder.
13:19 Even once a deal is signed, you know, there is a transition bubble cost issue.
13:23 There is a, there are things that get scrutinized again from a spend perspective.
13:28 So I think it's just been that higher scrutiny that is delaying some of this conversion from
13:32 DCV to revenue.
13:33 But I think the bigger issue also is the extreme amount of tightening of discretionary spend.
13:39 Got it.
13:40 Gentlemen, you have a call to do so I'll leave you at that.
13:43 Thank you so much for taking the time out.
13:45 Manish, Nitin, really appreciate your time this morning.
13:49 Thanks Neeraj.
13:50 Thank you so much.
13:51 Thank you.
13:52 Thanks for tuning in.
13:59 Thanks for listening.
14:00 We'll see you next week.
14:01 Bye.
14:01 [BLANK_AUDIO]
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