Firstsource Solutions Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Shradha from AMSEC. Please go ahead.

So, just a couple of questions. Growth in FY24 in the second half was strong. But if you look at the overall growth in FY24 it was broadly lead by just one vertical CMT and on a smaller base by diverse industry , should we look at growth strategy in FY25 in terms of whether it will be a broad base growth across verticals, will this still last in favor of one or two verticals?

Thank you Shradha for the question. If I look at the outcome from Q4 of FY24. One of the elements that I talked about in my opening remarks was the fact that our growth in the quarter was broad based across verticals and geographies. Number two, we have added several new logos across industry verticals and not just restricted to one or the other. And number three, we have had good client traction as well as wins in existing accounts across all industry verticals itself. That gives us confiden ce that the growth that we will see in FY25 will be broad based across verticals and geographies.

Right. And in terms of if I can deep dive into BFS, how to catch sub segments like mortgage playing out, we have seen some stability in the mortgage sub segment over the last two quarters, but incrementally what are you picking up in terms of growth rates for this particular sub segment in FY25 and beyond?

So, without getting into specific s Shradha, what I will say is our mortgage business segment was largely stable in Q4. That may be the typical quarterly volatility in that part of our portfolio, but if you look at what we have been seeing, we have been making concentrated efforts to proactively increase our footprint, both from a market segmentation standpoint, beyond mono liners to mid -tier and regional banks, as well as expand our service portfolio into the servicing and HELOC market. And even venturing i nto adjacencies on the real estate vertical side. We feel that our efforts in those areas are getting results with some of the wins that we have had in the last two quarters. So, while there may be quarterly aberrations which are difficult to call out, we think we are well on track in terms of weather proofing our business from a longer term perspective, and continue to be encouraged by the wins that we are seeing in the financial services side, including the mortgage segment.

Fair enough. And just one last question if I could, on this acquisition, what incremental capabilities are we getting from what organically we provide in the RCM sub segment in the healthcare provider sub space?

So, if you look at where we historically played, we derived a bulk of our business in the revenue cycle side on the front end of the revenue cycle value chain around the eligibility front. And then on the back end around, the AR follow up and collections side of the house. What the QBSS acquisition gives us is, actually three sets of things, number one, it gives us capabilities in the mid to back off back end of the revenue cycle value chain, particularly around coding, denials management, clinical documentation, improvement, so on and so forth. Number tw o, it gives us about close to about 1800 people who are all offshore based, and allows us to enter a segment of the market which is the physician market that we weren’t historically playing in. So, now we can provide this combined set of capabilities which is really end -to-end across hospitals, the physician segment as well as the large integrated health systems. And third, what I am very enthused by also is the technology capabilities that come with the acquisition because a lot of those are tech and AI led which allow us to disrupt the traditional revenue cycle management and some of the competitors in the space who have largely built people based models. So, we think this combination allows us to compete very strongly in the marketplace.

That’s helpful. And just one last question, strong cash flow position, our debt numbers haven’t changed much vis-à-vis FY23. So, what does the debt repayment schedule look like for us?

Dinesh, you want to take that.

Year-on-year we have reduced the debt by almost 1 17 million, although the last quarter it has increased. And we believe normally these are all working capital debt which we used to take for the support of the businesses. Probably this will remain around similar levels for the next year.

Thank you. The next question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.

Ritesh two questions from my side . In your long-term guidance in your basically, the mid to long term guidance that you have given in terms of $1 billion exit rate by FY26, just wanted to harp upon what is the kind of assumption that you are building upon while giving this guidance. So, is it basically just driven by the company level deal wins and the execution that you expect or is there also a bit of an element of favorable macro that comes into play, either on the mortgage si de or on the healthcare side or any other businesses that you might be working in?

So let me start by saying that when I came on board in the very first earnings call, one of the first comments that I ended up making was that we are trying to build a business that’s resilient and durable over the long term as opposed to being exposed to any cyclicality or macro elements and try and minimize that to the extent possible. As we have provided our medium term guidance and said that we are looking to get to a billion dollar exit run rate in FY26. The intent behind that is reflecting the same design principle which is, we want to minimize the impact of the macro. And if there is a macro tailwind, that’s a net positive, that’s icing on the cake. Our guidance is today based on how we see the business shaping over FY25 as of today, I’m happy with the way actually today we are navigating the macro uncertainties keeping our focus on supporting our clients proactively in their transformation agenda and identifying opportunities to expand our footprint both within our existing clients as well as our new logos. And, I also feel confident of our revamped go to market strategy and the rigor that we are bringing in our execution. It’s a combination of several of those things. So, if you look at the consistent theme that we have seen over the last two quarters, and little more that I’ve been here, we have had a consistent uptick in our wins, we exited this fiscal year with the highest deal wins from an ACV standpoint, we still feel very comfortable with the pipeline and the quality of the pipeline that we have. We have had three consecutive quarters of headcount addition, and as in this business we don’t build a proactive bench. So , what we see in our headcount addition reflects the pickup in our deal momentum, and is a proxy for the strength of our executable order book. So, I will leave it at that but those are really the variables that make us feel comfortable about providing you the guidance of exiting FY 26 with a billion-dollar run rate business.

Got it, that was very helpful. And since you touched upon the employee addition, in this quarter the employee addition through the entire year of course has been very strong for us. How do you see that going forward, we have got a very good guidance for next year in terms of the revenue growth that we are expecting, do you believe these are similar run rate of net headcount addition might continue or given by what we are targeting the growth that we are expecting the headcount addition might accelerate?

Look, it’s not a very straightforward question to respond Vibhor. But, because our business also has a lot of there are elements which might require headcount addition, and there are elements where you are able to deliver on the back of the technology platforms that we use to render our services itself which, so when you look at that combination that is there, while we do expect on one hand, we will continue to add headcount going forward also to support the growth that we have forecast for FY25. It’s very hard to say whether or how it is going to compare in terms of what we saw this quarter or there abouts. But what we do feel very comfortable about at this stage is the fact that, is the guidance that we have provided for FY25, and we think we had come to support that guidance.

Got it that was really helpful. On the margins just to basically understand again the medium-term guidance of 50 to 70 basis points expansion each year, post the investment phase. So, how do we define the investment phase, is there a time period that we are looking at or are there any milestone that when we reach, this much of investment, or this is the capability that is when the investment phase ends, and that unfolds that we are looking for that kind of expansion?

So, let’s start by the guidance that we have provided for FY 25, we have given an EBIT range of 11 % to 12%, which in some sense is reflective also the fact that we do see opportunities for expanding the margin on one hand, but on the other hand also if you recall what we have tried to do in the business is based on the quality and the strength of the deal pipeline, and what we are seeing in the marketplace, we have also brought forward some of the investments that might have otherwise, probabl y played out over a slightly longer period itself, we think that those puts and takes will continue, in the near term as well. But let me give you a broader perspective of how we are thinking about margins. I am very confident about improving our margin trajectory over the medium term, without compromising on our growth aspirations or the investment plans. We have multiple levers for that, and we are laser focused on tracking the progress on all the same on a regular basis. For example, the onsite offshore shift is an obvious one where we have been focusing on for a while now. And you have seen some of that right in our offshore revenue share that ’s gone up by close to 6% in the last four quarters, including this quarter. Also, two-third of the gross addition that we have had in headcount in the last three quarters has been at offshore. So, there is a clear shift in demand patterns that we are taking advantage of. We are also working to optimize our sourcing and staffing strategies, we are closely looking at our employee pyramid, and how we staff our project delivery teams, we are also looking at right-shoring the resources across operations and operations support functions. Technology, AI, and automation is something we have been looking at actively across the lifecycle of an engagement to drive further efficiencies. And we have also been actively looking at opportunities to centralize, automate, and offshore roles where relevant and support functions. I had also highlighted in my opening commentary about how we are using automation and AI in our onboarding and training process to improve the speed to competency. So, given all of these different levers that are in place, I’m actually very confident that we will be able to improve our margins over the medium term with the numbers that I cited of 50 to 75 basis points per year.

Got it. If I may just squeeze one last industry level question. We announced this acquisition in the healthcare industry. We have been doing really well in the industry any which ways. T here are lot of other players also, not just our direct competitors in the industry, but in the broader IT industry itself. Everybody is focusing a lot on the healthcare segment. Do you believe that the competition in this industry is becoming very, very high at this point of time, especially given that everybody expects the healthcare spends to go up post COVID. So, do you see competition going very high and do you believe this spend is going to continue or could it be just some pent -up demand post COVID that is being add ressed at this point of time. And in a couple of years’ time it might just maybe plateau out and we are left with not that bigger demand, but too many players who are competing for that pie?

So, let me start by giving a macro comment on the US healthcare industry right. You all know the numbers better than I do , but if you look at the amount of money that ’s spent in US healthcare that ’s give or take about one sixth of the US GDP and continue to go up considerably. One of the reasons why that ends up happening is because of inefficiencies , waste and abuse in the system that ’s there. And a lot of the root cause of that is incentive misalignment between different players in that eco system itself. At a more structural level, this market is in a transition phase, we are working through post pandemic dynamics in the workforce, as well as the way patients utilize care itself. This in some sense is driving up cost, and affecting the revenue provider organizations who are facing significant pressure on reimbursements from payers. If you look at the healthcare provider market, most of these companies are either losing money or are very low single digit margin shops, and therefore their ability to survive and thrive, in some sense is increasingly dependent on their efficiency, produc tivity and optimizing revenue capture. That ’s where we have an opportunity with what we bring to bear to impact the provider side of the equation. Now, if you take the payer side, different set of issues, Medicare rates just came down , so there is this constant theme of falling reimbursement rates. And that’s putting significant pressure on the P&L of major health plans. So, our ability to impact the MLR and ALR of the healthcare payers, is creating opportunities, in terms of the transformation initiatives that a lot of these payer organizations are driving , that in some senses is what is contributing to also the AC V wins that we have in the segment, but also the quality and quantity of our pipeline and therefore we feel comfortable that, that momentum should sustain through this current financial year as well. Now, your other comment was that look, a lot of players are showing interest to space, what I think holds us in good stead, is what I will go back to an opening comment that I made when I just joined , what differentiates Firstsource more than anything else is the fact that we are not trying to be everything to everybody, we have a set of verticals that we play in, where we are an inch wide and a mile deep. We want to remain in that swim lane and continue to double down where we build deep domain, end -to-end capabilities, front to back , lead with technology , data and analytics . Our ability to bring all of these attributes consistently creates a competitive moat, and differentiation for us in the healthcare space. And that’s the reason we are able to hold our own against players in the marketplace. The other element that also helps us is the fact that we can move nimbly and at speed to respond to the business challenges that our customers in the space are facing and that creates differentiation also. So, therefore, we feel comfortable with what we are seeing in the healthcare vertical, both across the payer and the provider side.

Thank you. The next question is from the line of Dipesh from Emkay Global. Please go ahead.

Couple of questions. So, I just want to get a sense on trust and safety. Now, we have a leader also for the scaling that business. If you can give some sense about the focus area in that business and the focus area which we identify to scale it what would be the addressable market for the identified pocket of the trust and safety space. The second question is about platform automation and analytics, the service line which we report, if I look the overall narrative of tech lead team, the softness is a bit puzzling. So, if you can give some sense why platform automation analytics service line is showing some kind of softness. Third question is about investment, partly you alluded but I’m yet not clear. So, I just try to get more clarity. How long do you expect this investment phase to last because you indicated post that phase 50 to 70 bps expansion in EBIT margin. So, whether it is one year, two-year, three-year investment kind of phase, if you can give some sense on it. I have one data question, but first you answer these three, then I can have the data related question subsequently. Thanks.

All right. Thanks, Dipesh for the question. Let me start by talking a little bit about the trust and safety space and how excited we are with the addition of Akash Pugalia to lead the trust and safety vertical. I want to give you a little bit of color on Akash. He comes to us from Teleperformance where he was running a $1.2 billion business and managing the trust and safety vertical globally. And before that, he was at Accenture where he led the global trust and safety business. I’m excited that he has come on board to help spearhead our efforts and create a disruptive challenger brand in the trust and safety space. The trust and safety market is a fast growing market. More than $50 billion in TAM and if you look at the way this market has evolved about five to seven years back this market didn ’t exist and as we came into vogue with the emergence of the big tech players Facebook and Google and Apple and a few other names Twitter, et cetera who wanted support from a content moderation standpoint. So, a lot of the work that was done at that point in time was largely people reviewing different content across different media to see whether something was objectionable, abusive, so on and so forth. With the advent of tech lead solutions and AI, we are firmly in the realm of trust and safety 2.0. Our opportunity out here is on two counts. 1. This is no longer in the realm of just big tech, but it’s a cross industry play every brand and every industry is looking to monitor the content that comes from a reputational risk standpoint, as it pertains to their brand itself, we see an opportunity there across all industry verticals. 2. The entire place now tech lead, so our ability to offer a disruptive proposition out here allows us to capture the TAM that’s there with all industries, but also disrupt some of the traditional players who have built a business which is again being people based. And this combination allows us to build what would be a very credible business. So, that’s my response to trust and safety and why we feel excited about the opportunity there. The second question that you had was around platforms, automation, and analytics. I wouldn ’t read anything into any specific quarter from a numbers standpoint or a percentage contribution, what I will say is that, technology and everything we do is a firm part of the agenda that manifests itself in every deal that we respond to, every existing client that we do work for where we are trying to see where the opportunities are for us to continuously transform the way we run their operations. And that, in a nutshell is why we feel comfortable about it. What we have also done in this space, is as you recall one of my first hires when I came on board was getting head of partnerships to be the custodian of all the work we do with a startup ecosystem. And we are seeing some very good results working with several startup companies who bring some of their IP which allows us to deliver cutting edge solutions which solve specific problems that our clients are facing in each of their domains. One proxy of some of the work that we are doing in the platform’s automation and analytics side is the recognition that Microsoft just gave us as being an AI first mover. So, in some sense, it ’s a proxy, but also a good reflection of the work that we are doing which is now getting recognized across the board as well. That would be my response to your second question. If you wouldn’t mind, could you repeat the third question again?

Sir investment phase, which you indicated how long it will last, post which you said 50 to 70 bps expansion?

Yes, so let me take a little bit of a step back and tell you where we are making the investments first. So, we are making investments in broadly three areas. 1. In expanding our sales and accounting, and I spoke about how our sales teams have grown by a third over the last six months. 2. On the capability side where we are doing both leadership hires as well as beefing up our solutions teams. For example, we hired Hasit as our Chief Digital and AI officer to modernize our services and platforms by continuing to infuse them with the latest t echnologies. Akash, who we talked about earlier, joined us with a mandate to grow our trust and safety practice. 3. Amplifying the Firstsource brand. Aniket Maindarkar who joined us earlier this year is leading our efforts to expand our relationships, and visibility in the industry analysts and advisors community. And you have also seen the refresh in our brand positioning, that’s more dynamic and in line with our larger aspirations. Our original intent was to space these investments over a period in time , but seeing the positive feedback that we are receiving from customers, we have decided to bring forward some of these. At the same time, we remain prudent and mindful of our intent on margin management and also some of these investments would be ongoing so it’s difficult to call out the exact quarter by when we will be done making investments because the landscape around us continues to evolve. But I do believe a large part of this is front loaded.

No, I was not looking from a quarter perspective, but I’m looking from year perspective is it a two year journey, three year journey, if you can give some sense around it?

So, what I would say is that in the medium term which I would define as a three to four year time horizon, our expectation is that we should be able to get 50 to 75 basis points each year in the medium term itself in the next three to four years, so it ’s not about and which would probably play out starting in the next 12 to 18 months itself, you will start seeing some of that playing out.

So, in a way let say this year we are closer to 11, if somebody is looking for FY27, one should look 50 into number of years, that is one way to look at it?

I don’t want to get into specific guidance. But what you should think about here is that, in a medium term time horizon we do think there is an opportunity to get margins up 50 to 75 basis points every year. And our current year guidance is also reflective of that and the fact that we do expect it to be between 11 % to 12% from an EBIT standpoint.

Fair point. And last two things, trust and safety you said content moderation. Now there are multiple areas right data security, cyber security, conduct behavior, all those we would be largely restricting ourselves into content moderation and it is text or video and all those things covered there?

It would be all of that.

Okay, great. And last is about data related thing maybe Dinesh can help me out , on the acquisition, amortization related charges. How once should look at it?

We have not done the al location analysis on this one. So , I will come back to you exactly how much we are looking at because this required a purchase price allocation study to be conducted which will be done in this quarter. So, then I will come back about the value of amortization.

The next question is from the line Manik Taneja from Axis Capital. Please go ahead.

Ritesh, I just wanted to get your thoughts on a couple of things. One is that you have been talking about new client deals being significantly higher than what we have seen in the past. If you could dwell a little deeper into it, is this basically driven by clients need for optimization or a function of our proactive pursuits, that’s question number one. The second question was with regards to the increase in the offshore delivery mix that we are seeing for you as well as for industry. If you could give us some broad sense as to how should we be thinking about the profitability metrics between the local and onshore delivery that we have been accustomed to in the past versus offshore delivery mix and how should we be thinking about this mix probably over a three-to-five-year period.

Thank you, Manik. So, let me address the first question that you had on new client wins. What I will say is, there are two or three themes that are playing out. Number one, is the fact that in several of these discussions where we are taking a proactive proposal which addresses the cost optimization, process transformation and revenue growth agendas of our clients, we are seeing strong receptiveness . That is contributing to some of the wins that we are seeing at a much larger value than what we might have seen in the past where we may not have necessarily taken those proposals at the same velocity itself. The second thing that we are also seeing is, is one of the comments that I made, is in a lot of accounts where we may not be there, but maybe some of our scale peers are there or some of the other smaller undifferentiated competitors might be there as incumbents in those accounts where we may not be present. Our opportunity to provide a truly disruptive proposition as a challenger brand, is also yielding results because we are playing on offense and our ability to go out there and win on the back of that is certainly supported with the kind of innovative solution that we are taking to the marketplace itself. Third, what is also helping us in several of these new wins is what are the attributes of what Firstsource really stands for. In the verticals in which we play we are deep domain; we are end-to-end with tech data and analytics lead. And that combination, is allowing us to provide unique solutions that can help address the expectations of our customers itself and therefore when we go to any new clients situation, that secret sauce is helping us. These are the three things that are contributing to the value of the deals that we are seeing amongst the new logos that we are winning in the marketplace itself. Your second question was related to the offshore , onshore mix and how should one think about it. I will say one thing which is, if you look at the last three quarters, the contribution from offshore has gone up by almost six percentage points. And we expect that some of that will continue to play out going forward as well, in terms of how we see the outlook for the business. What we do see also at the same time and this might sound seem a little paradoxical, but I do think it’s a competitive advantage having the local footprint in the US and UK, or in the primary markets in which we operate is actually a source of competitive advantage. Because several of these clients, increasingly, are caught in an environment where they want to work with a provider who is culturally sensitive and attuned to the local environment. They are mindful of the implications of going out there and offshoring right at the outset. And they might look for somebody to help transform the way they work and then move work offshore as well. So, our local footprint actually, in several instances is serving as a source of competitive advantage. So, while I do expect as a secular team, we will continue to see progress on the contribution from offshore. We do think the footprint that we have onshore is also serving as an advantage. Third is, we are also trying to with our existing customers, where we may have some sort of an onshore footprint, also trying to increase the amount of work that we do offshore and therefore increase our share of wall et in those accounts. And that endeavor is also yielding results. So, it’s really a combination of all of these three, it’s not one or the other.

Sure. Basically, when one thinks about the CX opportunity over there, over the course of last 12, 18 months, you have seen consolidation amongst the bigger players, is that driving some sort of growth opportunity for midsize players like us, given the client vendor concentration risk that customers may see with some of the large CX players, that’s question number one. And the second related question was, in our case we have historically had limited presence in Philippines. Do we see this dynamic change over the course of the next few years?

Yes, so let me address that Manik. So, we see opportunities playing off on three fronts on the CX side. Number one, what we are taking in the CX market, which is deep domain for a particular vertical itself, and let me give you examples of that. When we are talking to an EdTech customer we are talking about the learner experience and what we can do there. When we are talking to a healthcare payer, we are talking about a member experience and what that means. When we go to a media company we are talking about a subscriber experience. Each one of these is very, very deep from a domain standpoint, and that ability to combine it with the CX capabilities with technology allows us to benefit from the opportunity set that’s out there. The second thing to just bear in mind is also the CX markets still, even though it’s the largest part of the TAM for the global BPO industry, it is still sufficiently under penetrated from a outsourcing and offshoring standpoint. There’s still a significant part of that business, which is almost two third, which is still in source. What I do expect to play out over the next three to five years, is the fact that that percentage of outsourcing and offshoring will go up. It may not necessarily happen in a linear fashion, but in a nonlinear fashion, taking advantage of some of the tech nologies that are available in the marketplace. And we think we can be a beneficiary in that expanded TAM, that ends up playing out in that market. So, that’s the second comment I want to make. The third comment I want to make is, we also see opportunities to benefit at both ends of the spectrum, on one hand we expect to benefit from the large, pure play CX players who may have grown by bulking up and doing all acquisitions where as you rightly call it out there could be concentration risk. And several enterprise clients are citing that as a cause of concern where they may look to diversify. The second thing that also is playing out with some of the large players is they ma y not be moving fast enough to bring the necessary benefits from a transformation standpoint, and therefore playing on defense as opposed to playing on offense. At the same time, at the other end of the spectrum, the CX market also has a long tail of smaller undifferentiated players who are trying to be everything to everybody. We see an opportunity to take share from both ends of the spectrum and that in turn will contribute to the growth of our business which will allow us to build a resilient, durable tech lead CX business itself, and that ’s something that we feel comfortable with. Your second question was related to Philippines. We do expect our footprint in the Philippines to continue to scale up. In fact, we have just taken an additional facility out there to support some of the deal wins and the pipeline that we have seen in the Philippine market itself. So, certainly that ’s in line with that expectation.

Thank you, ladies and gentlemen. We will take that as the last question. I would now like to hand the conference over to Mr. Ritesh Idnani for closing comments.

Thank you for joining the call and your questions. I just want to close with a few final comments. As I have highlighted in the past, the discontinuity is caused by the ongoing macro and technology shifts are creating market opportunities. And my focus is to use our strong foundation to take advantage of these opportunities. Our revamped sales engine is working well. This is reflected in our deal wins in FY24 that were at an all- time high and we have now had at least one large deal win for three successive quarters. Our Q4 closing pipeline is up 25% year-on-year and gives us confidence for the guidance that we have provided. We are also executing well and we had another quarter of robust hiring. I’m particularly excited by the QBSS acquisition that enables us to upscale our play in the fast-growing offshore revenue cycle management market. Overall, I’m satisfied with the progress on the strategy refresh under the One Firstsource framework. And we are optimistic about realizing our long-term growth aspirations. That’s all from our side. And we look forward to interacting with you again in the next quarter call. Thank you.

Thank you . On behalf of Firstsource Solutions Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.