Hexaware Technologies Limited earnings call

Thank you very much. We will now begin the question- and-answer segment. To ask a question, please click on the raise hand button at the bottom of yo ur Zoom interface to enter the queue. Once announced, kindly unmute yourself, state your name and organization, and proceed with your question. If your query is addressed before your turn, you may press the lower hand button to exit the queue. We will pause briefly to allow the team to assemble the list of participants. Our first question comes from Prateek Maheshwari at HSBC. Your line is open. You may now unmute and ask your question.

Hello. Thank you for the opportunity. Keech, I had on e question around the expectation for next year. I understand that probably 1Q has a lot of headwinds both around the calendar days and some client- specific issues. To hit again the mid-teen guidance, how do you think probably 2Q and 3Q will pan out? The deal wins, and the deal pipeline is very strong, as you've said, but it seems that it will be a very high ask rate for those two quarters as well. I just wanted you to double down on that.

Hi, Prateek. I said our growth will be better than 7. 6%. I said our long-term thesis of low teens to mid- teens is intact. But you're right, no matter what number you pick, the growth ask in Q2 and Q3 will be high. Like I said, we do expect to accelerate gr owth every quarter from Q1. So yes, that is the expectation that there will be growth. Now, the calendar in itself this year actually is going to give a little bit higher than usual growth from Q1 to Q2.

Beside the headwind from the GSE client, do you think the headwind which company face from the professional services' client, do you think that is curtailed now and probably that should start growing as a run rate basis? There were two clients in PS. One where we won th e consolidation deal. We've been gaining market share. There was plateauing at the beginning of their fiscal year, which is July, and that will come back to growth. The other one where we had a very sharp decline, I'll say 75% decline from where we were a year ago, that stabilized. I think what you will see is that we will get growth again from Q2 in this vertical. On the other one, the GSE, our best read is that they still haven't decided on the consolidation deal. The cuts and the lack of allocation of budgets early in th e year is essentially, we think, pending the decision. We expect that once they decide, those factors will change. Nevertheless, again, in our base growth that we put here, we haven't assumed that. In fact, we assumed, because we're an incumbent, we've assumed some downside case because they haven't decided it, we could win or lose. We assumed downside case, too. That's the commentary on the GSE. Prateek Maheshwari Thank you, Keech. Those are my questions.

This question comes from Ankur Rudra from J.P. Morgan. Your line is open. You may unmute and ask your question.

Thank you for your comments on AI, Keech. Just zoom ing out a bit, what's the best way to assess your relative competitiveness here? I'm asking this becaus e in the lack of anything else, investors normally look at growth. On that basis, if one looks at the gr owth trajectory on the last five quarters, we've gone from 16% organic growth CC basis to perhaps flat this quarter, maybe 1%. It's a bit of a contrast versus what we've seen in your peers with broadly simila r mixes. Maybe you can highlight why the investor should not assume AI is more negatively impacting you versus others.

If you recall, I think last quarter or even last quarte r prior to that, I said that for CY25, our performance issues are not to do with AI. I'll say that my view in general for the industry, I do think there'll be an impact on growth for the industry and for us, and we 've accounted for it in CY25. Now, I will reiterate why, I think… Actually, not only are we at par, I think we are way better. We've been first off on a number of fronts. I'll recount them again, some of th em again. What you will see is that these are all long-term large opportunities, don't necessarily transl ate to bookings or revenu es in any material term in the short term. We were the first to launch a legacy modernization platform. There are any numb er of clients that have given us a trial run. These are very large customers that don't do it only with us. They have benchmarked us with any number of others in the industries, and they think we're the best. I could potentially think of having one of those clients speak to you, guys, if it's of interest. We can certainly show you what we do. I think seeing will be believing. July last year, we launched a vibe coding offering. Essentially, we said we can build software 10X faster. Nobody else went to market with that at that poin t of time. Three weeks ago, we launched an offering called Zero License. Essentially, think of it as a SaaS skill. What we're telling clients is, we can get you to exit all your license software over time. We identifi ed a number of what think will be easier to execute use cases and types of software to do initially before people start getting closer to the core. The base stuff is the AI embedded in our platforms for outsourcing. We certainly went through a phase where that was weak. I think in Q3 and Q4, we have ha d significant wins. To be sure that performance is not demonstrated in our numbers yet, but you will see it in the future.

Thank you. If you could clarify, you mentioned you baked AI as a dampener in the existing business as you renew things for this year also. How should we think about the level of impact on an existing renewal? Is it 30, 40%? Is it a lot more? Given it's evolving at a very rapid pace, as you mentioned as well, how is this changing?

Yeah, so I'll say if the scope were to remain the same , it could be in that 30 to 40%. I'll say 20 to 40% depending on the type of work. In some cases, at le ast, I think it comes with a higher volume. For the same scope, that's the auto-magnet of production.

Thank you. Just the last question. You mentioned 1Q is going to be softer than seasonal. Fourth quarter is seasonally soft. The bulk of your ability to beat la st year's number, overall, perhaps organic of 6% falls to the 2 quarters. Just wanted to know, how much visibility do you have to hit the mid-single digit growth rate you need sequentially for those two quarters?

Like I said, we have some lessons learned from communicating and setting expectations. Basis the deal wins, there's a lot of confidence in these numbers. Wh at can happen more is if the deal wins that don't have a number, like the consolidation deals, some of the consolidation deals, if they grow, and we grab a lot of market share there, that will grow. The base is based on deals that we have won.

I appreciate it. Thank you and best of luck.

Thank you.

Our next question comes from Vibhor Singhal at Nuvama Equities. Your line is open. You may unmute and ask your question.

Yeah, hi. Thanks for taking my question. Couple of qu estions from my side, and then I have one question for Vikash. On the Healthcare vertic al, I just wanted to pick your brains on how are you looking at the outlook given that the US government Medicare spending next year is expected to be flattish as against it has been growing around 5% historically. This qua rter also, we saw basically a sharp correction in the Healthcare vertical. How do we tie these two things together, and the overall outlook for the Healthcare vertical for us, specifically, and maybe for the industr y in CY26? My second question was on the margin outlook for next year. From the face of it, it look s like you're downgrading the margin by almost 100 basis points. If you could basically call out the put s and takes for this, what are the major reasons for this? Also, do we expect this band to be back to the 14 to 15% in CY27, or do you think this is where we will settle it?

Okay, so the first one on Healthca re, for good or bad, we don't have much exposure to payers or providers. Now, that's a huge net new opportunity for us. We do have some, but our historic presence is in the Insurance side and life scienc es, less so on core health care, and that's a net new opportunity for growth. Notwithstanding the headwinds in the industry, our starting point is at a much lower level. The person we hired, Shantanu, rated as top 25 healthcare IT execs, so we feel good about where we're going in that business, and we will do very well. On the second question, I'll reiterate a couple of things I said. The margins are going to be lower because of deal ramp-ups in the first part of the year, primar ily because of deal ramp-ups. Three of them actually have re-badging components , which will depress our margins. As we normalize for those deals, it will actually improve in second half of the year. Actually , if things go right, we will not only get back to normal in CY27, actually, we'll get back to normal a lit tle better even in the second half of the year. The margins that I'm talking about in this are not the new base. Actually, there'll be quite a bit of difference between H1 and H2. H2 will be higher than or at least as much as the normal base.

Our next question comes from Anmol Garg from Dam Capital. Your line is open. You may unmute and ask your question.

Yeah, hi. Thanks for the opportunity. A couple of questio ns. Firstly, a bookkeeping one. If I look at your note 13 in our BSE release results, then the impair ment there is written at around 107 crores, however, in our PPT, the impairment is near about 3.7% of revenues, which comes a little higher than that. So wanted to understand where is this 60 to 70 basis point difference coming from?

There's no difference in terms of the numbers. It's the same number what I called out in terms of the impairment. In the notes, if you see there are two notes with re spect to the impairment, you need to add both the amounts to the impairment to get to the same numb er what we have from a presentation perspective of what I covered. It's been split into two different lin e items in the notes. I'll give you the specific note reference numbers. If you have any other questions, you can continue. I'll come back on the specific note references.

Sure. Second question is basically on the growth for ne xt year. So there will be some incremental impact of CyberSolve as well, which will add in around 3.5 odd quarters of impact. Are we saying that growth next year would be better than that excluding the acquisition impact as well?

We're saying our growth will be better than the 7.6%, which is the reported of this year. This year also, there was an impact due to acquisitions. Next year also, there will be some carry forward impact, but what we're saying is our reported number will be better than 7.6%.

Understood. One last thing, just wa nt to tie up utilization dip in this quarter, along with the headcount increase that has come in. With that, we are indicating that 1H, particularly, would be a slight negative during the quarter. Why are we inching up headcount over the last couple of quarters?

Preparing for deal ramp-ups.

Sure. Just one last thing on the license. We have in dicated that there is a $6 to 7 million license drop during the quarter, so is there any resale component as well into this license or this is something which are our own products?

No, these are not our own IP. These are third party licenses. It gets baked into the work we do, but it has a little bit of cycles. Sometimes it gets baked into the work we do, sometimes it's independent. For example, ServiceNow, we do quite a bit of work. Some of the clients do the licenses also with us. No, these are not our IPs.

I just wanted to clarify one thing. The impairment numbers, what you were trying to look for from a balance sheet perspective, if you look at note 10 on the balance sheet, it calls out the consol impairment impact of INR 1302 million. So, you can look into that.

Our last question comes from Dipesh Mehta at Emkay Global.

Okay, thank you. Thanks for the opportunity. A couple of questions. First, just want to understand about the acquisitions. If you can give some sense abou t SMC and Cybersolve, how those acquisitions have played out because now I think a number of quarters have played out. In terms of synergy benefit, what we envisage, as well as capability expansion, have they help us to extend our overall addressable market. If you can give some sense. We made so me impairment provision in some of the past acquisitions, if you can help us understand it pertai ns to what. Second question is about the overall deal intake. We said we have a good healthy intake in Quarter 4, but can you provide some sense about how the ACV played out in CY25 compared to, CY24? Any change we made to guidance practice, the way we guide for future, if any changes we made to give some comfort about the way we guide.

I think our Softcrylic, which is in CY24, is not doing well. That's why you've seen the impairments. To be sure, the payout goals were aggressive. They are for the other acquisitions we've made as well. Reversing payouts doesn't necessarily mean bad perfor mance. In this case, I would say the performance was not good. I think that's part of the reason why we didn't do well in CY25. I'll say two software clients, substantial ones, went bankrupt during the year in CY25. Vast majority of the work is also in the Consumer and Manufacturing se ctor. That's not a sector that's done well due to macros. One of the reasons are in aggregate, it didn't do well. CyberSolve is still too early. It is not even a quarter, not even a full quarter yet, so it's still too early. We e x p e c t i t t o d o w e l l . I t ' s v e r y a d j a c e n t t o w h a t w e d o i n c y b e r s e c u r i t y . I t ' s a s e r v i c e t h a t w e s e l l . Otherwise, when we have been selling, we didn't have the capability to exec ute. We actually sub a bunch of that work. Very adjacent, we expect it to do well. SMC, the world is going to GCC. Whoever is not there, is going to set up one. Who is there, is going to grow. Of course, it's not only India. I think the fact that you need the capability to do what SMC does is necessary. I think it gives us visibility. Lots of customers were thinking about GCCs who were not thinking about us before, clearly do now because of this acquisition. Every quarter since we acquired, we announced a deal, including Q4, we said major IT services from Asia, scale GCC deal we won.

I think our most important one is to be more conservative, is to make sure that we can meet what we said we will do. Dipesh Mehta ACV trend, if you can give some sense of how it played out, CY25 versus CY24. Where we ended in CY25 is better than where we ended in CY24, quite a bit so. In terms of bookings, we carry forward into the year. In addition, our pipeline is also materially better. Now, we've spoken about some structural things that went into this. We bui lt a new hunting team through CY24, the second half, CY24. Essentially, the current team, as it stands, came together at the end of CY24. I think it took some time for them to learn, settle in, become productive, and it is now working well. The results for us were in booking in second half of CY24. That's why I said where we ended the year was much better than where we ended CY24. You'll see that translate into revenues through the course of cy26.

Understood. Thank you.

I think that's the last question that we will take. Keech, any final remarks? Then we'll close the call. Thank you all. I look forward to talk to you again next quarter.

Thank you.