Hexaware Technologies Limited earnings call

We will now begin our question-and-answer session. If you have a question for today's speaker, please select the Raise Hand button at the bottom of the Zoom interface and you will enter a queue. After you are announced, please unmute yourself, state your name and company and ask your question. If you find that your question has been answered, before it is your turn to speak, please press the Lower Hand button to leave the queue. We will now pause for a moment to allow the team to gather and assemble the queue. Our first question comes from Ankur Rudra from JP Morgan. Please unmute your line and ask your question.

Hi. Good morning. Thank you for taking my question. So maybe to start with, Keech, you gave a lot of detailed outlook. Thanks a lot for that. Could you maybe elaborate a bit more on the nature of client feedback you're getting across banks, financial services, manufacturing and travel on spend intentions, and how widespread are your client ramp downs and cancellations? I think you referred to two of them, specifically. Thanks.

So I had the benefit we had in the first week of April, an annual client meeting at Pebble Beach Golf Resort in California, and we had call it 50 clients in that location. We had conversations with a number of clients about what did the macro mean for them, positive, neutral, negative. I think manufacturing clients, a lot of them actually pulled out of the event. That, in of itself, tells a story and the ones that were there clearly said we have trouble. There were a surprising few client that actually said it's a positive for them. It was a surprise to me, but for them it was kind of, "Hey, this is a positive for us." For example, there's an insurance client that said, "Anytime there's high volatility, people tend to buy more of our products." The vast majority said it's kind of a second order impact, so it's a wait and watch. They don't have any kind of specific plus or minus plans that are in motion, it's a wait and watch. Now, Ankur, you said something, I mentioned a couple of client ramp downs. Actually I didn't. I mentioned one, which is a project that was scheduled to get over. Normally, there will be follow-up work from that, but that client, because of financial issues, did not choose to continue. They've chosen not to continue, at least for now. I can't recall another one I mentioned.

So the other one is the ramp down on your GSE client where you will be hit this quarter onwards. I was referring to those two. Yes. Sorry, yes.

But are there any other besides those two?

No.

Okay, thank you.

I mean nothing which is not on the normal course of business. Yeah.

Okay. So given all of this, Keech, what kind of visibility do you have into the year now, given the headwinds you face? Do you think you will be able to sustain the double-digit growth momentum, given you face somewhat tough comparable in both 2Q and 3Q? And also if you can summarize the full-year outlook in a way, how should we think about it versus what you did in the first quarter or what you did last year? Thank you.

Yeah. So I did say that Q2, lets start with Q2, right? But actually Q2, our underlying role will be solid and actually because of the two clients that you refer to, it'll go from an outstanding quarter to a good quarter. So we'll still have a good quarter, and those two quarter-on-quarter headwinds will go away for Q3, and actually Q3 growth will accelerate. So we actually expect to have a pretty solid year, Ankur.

Okay, understood. Maybe the last question on the GSE side, just to clarify. Your second GSE client, the impact will happen for two months in the current quarter, it'll complete in 3Q, right? Is that the main to understanding this?

Two and a half months, yeah. I mean, little under two and a half months. Two to two and a half months for current quarter and full quarter from the next, yes. But their intention, at least right now, what they've stated is that they will make pretty quick decisions on the consolidation because that's a more sustainable path to cost reductions. Right now they've kind of taken up, as they described it, a peanut butter approach, just uniform cuts. They haven't given thought to programs and things like that that get impacted. That's not a sustainable way for them, more sustainable ways through consolidation effort.

Got it. Appreciate it. Thank you so much. Right. Just a reminder, if you would like to ask a question, please use the Raise Hand button, which can be found at the bottom of your Zoom interface. Our next question comes from Abhishek Kumar from JM Financial. Please unmute your line and ask your question.

Yeah, hi. Thank you for taking my question. Keech, you mentioned that now Hexaware is increasingly participating in vendor consolidation or large deal scenarios. So one question is what is helping us win more in these deals? And second, have you seen more pricing pressure around large consolidation deals? Because it looks like these are the only type of deals out there in the market.

So I'll say, I think the first question is not even why we win. I think the first question is why are we in these deals? Because they can only happen large, very large opportunities can only happen in very large clients, and I think it's a very systematic effort for us to hunt material logos. And I think we've mentioned in the past some 61, 62% of our revenues comes from clients whose revenues are above $5 billion, and that's not an outcome without a focus and an effort behind that. So I think once you get in and you deliver well and over time you get an opportunity to play in this, right? As of now, much of these opportunities that are in front of us, we are not CapEx fund. It's really kind of no downside or potential upside scenarios for us in many of these. Clients have chosen not to put our book of work into the mix or, in many cases, we are not even in that lane for that. But yet we've done well somewhere else so they've put us in play for something larger. Why we win the ones that we've won is I'll say it's really kind of three things. One, whatever we executed, we execute very well. Two, we are able to bring more intensity and focus to the clients. And three, customers love our platforms.

Okay, understood. Maybe one last related question. It looks like the deal wins have been healthy. Any color on what would be the TCV order backlog we are sitting on compared to where we were maybe a year back, and which verticals you think order bookings are strong. And maybe a related one is we have seen, you've mentioned a couple of ramp down, one ramp down and one delay, so that revenue deal TCV to revenue conversion. Do you think that would flow as usual or as we go through the year and there are uncertainty around, there could be gaps between TCV and revenue conversion? Thank you. The reason for the many gaps between TCV to revenue translation is the reason we're not reporting in TCV. Instead, I'm hopefully making it simple for you by translating it to specific revenue range of growth in the key deals. This is obviously not all of the deals, but at least the large ones, we're going to try and translate to a revenue growth over the next 12 months for you, which is what we've done for two other deals.

Sure, that's helpful. Thank you and all the best.

Yeah, I think you asked about vertical. I already gave commentary on verticals. FS and banking will lead for us and M&C will pull us down, what would otherwise been, or M&C will be a drag, others will be roughly on par.

Thank you.

Our next question comes from Shweta Seth from Alliance Bernstein. Please unmute your line and ask your question.

Hey. Hi. Thanks for taking up my question, and thanks for the presentation. So I have two questions. First is do you see any impact from reshoring in case of any risks due to any change in Trump policies? And my second question, I'm not sure whether it's within your scope to comment right now, but just the question will be around the refinancing risk for the bond. What are you thinking about the USD $1 billion bond that's maturing next year? What options do you have in case you're not coming to the dollar bond market? Thank you.

Thank you. So on reshoring, we're not hearing any clients talk about it, certainly as it pertains to our business. You are hearing enough announcements, including IBM most recently that they're kind of invest more in the US for manufacturing. There's nothing really about services. But should it happen, it's not necessarily a risk for us. I see it as an opportunity. We have a solid kind of employing brand in several major pockets around the US. I actually see it as an opportunity. The clients want to do more in the US. The second question we can do, like you said, the bond is not on Hexaware it's Carlyle. Nevertheless, I'll say that we have good options on the table, so you should not think of it as an issue. So when or much before the time comes, there will be an answer for it.

Okay. Thank you. Our next question comes from Manik Taneja from Axis Capital. Please unmute your line and ask your question.

Hi. Thank you for the opportunity, and my apologies that I joined the call late. So if you can, I don't know whether you've already answered that, but if you could break up the segmental performance between high-tech and professional services in the current quarter and how do you see each of those two parts behaving through the year? That's question number one. And the second question is with regards to some of the challenges or the pressure that you are witnessing with some of your GSE customers. Do you think this drives more expansion in your offshore revenue mix and thereby some sort of a tailwind to margins as well?

So on the first one, Manik, I mentioned earlier that we are actually going to split our high-tech and PS and we think that will give serious growth wings to high-tech. We've done this playbook before. Banking was embedded in a small portion of our financial services vertical. We separated it four years ago and has actually grown quite nicely, and we've acquired some major logos in the process. We're going to do the same to high-tech. High-tech, actually, is very small right now. So wouldn't be meaningful commentary to talk about differential performance between the two. Much of our performance is actually driven by PS right now, and that's the opportunity for us to do a lot better on high-tech and hence we are going to create a new vertical. On the second one, we did answer in some detail on it, so maybe we can follow up with you in a more detail, but I'll tell you the high level or the two clients, one of them there was a slight delay in a consolidation deal, but that's since started, so we are actually on good wicket there. The fact that we've started also to us is a signal that things are back to normal. The second one, there was a sharp rundown that was announced early last week effective immediately; that'll have an impact of 1% on the company revenue for the year, but that is behind us. They also said they want to consolidate 2,500 vendors to a much smaller list. And as having just shy of 20% there, and as a large vendor, we actually stand at a very good spot in that exercise. But there was more details, then perhaps we could do that offline, Manik, since we answered in some detail earlier.

Sure, Keech, my clarification on this one is basically does this provide an opportunity to increase your offshore revenue mix, given some of these GSE customers have largely been onshore service customers?

I mean, in general, I think we will improve our offshore mix. We did improve it this quarter, but that is not because of the GSEs. Actually, there are two other clients that have planned movement from offshore to onshore that was a revenue headwind for us in Q1, but a margin ... sorry, revenue headwind, but a margin tailwind for us. So I don't think GSEs will be a driver of improving offshore mix. I mean, there is a one-time step reduction that will be an improvement for offshore, but there's still plenty of opportunities, like I said. In some ways the downsides are behind us. We think there is potential large upsides ahead of us.

Sure, thank you and all the best for the future. Just a reminder, if you would like to ask a question, please use the raise hand button at the bottom of your Zoom screen. Our next question comes from Dipesh Mehta from Emkay Global. Please unmute your line and ask your question.

Yeah, thanks for the opportunity. Two questions, just want to understand because in second GSE client you indicated about immediate trim down kind of thing, so what factor led to it and whether you see risk it to play out even in the another client? Second question is about the CY25 outlook, whether any change, let's say based on what you observed in Quarter 1 and likely to see in next three quarter, compared to what we might have expected at the beginning of year, if any changes?

See, on the first one, I mean what led to the reduction, I explained earlier, but the client is simply doing, and this is their words, quote unquote, "peanut butter." There was an ask from the administrator to reduce X amount of cost and they did, and they didn't give thought to where, what programs, what they were, nothing. That is all kind of phase two through a consolidation, a more thoughtful exercise that has already started. There's an RFI out already and their desire is to rapidly make a decision. And like I said, because we are the largest, we feel good about it. More than largest, we deliver outstanding work in critical programs for that. So there's no real why except, hey, it's a peanut butter spread off the cut. Could it happen in the other one? I don't know. It's not happened till now. More importantly, I think our at least initial intel is that the administrator thinks the other one is better run. For example, they had already a hundred percent work from office implemented for three days a week. That was one of the big first things for the administration and these guys already have done it. Sorry, what is the second question, Vikash, can you remind-

CY25 outlook, whether any change based on what we observed in Quarter 1 and next three quarter?

Yes. Yeah, listen, I've called the negatives out very specifically and tried to characterize it as much as I can. There's a number of positives, so there's lots of pluses and deal wins. What is true is that our deal ramp-ups are, some have started in Q2, but it'll continue ramping through Q3, Q4 and others will start in Q3. So we will actually have pretty solid quarters ahead of us. I'll leave it at that. I've said we won't do guidance, so I'm going to stick to that. We will have, Q2, I want to reiterate, it would have been a great quarter, it'll actually be a good quarter because of the two specific headwinds in Q2. Q3, those Q o Q headwinds will go away, so we'll actually have accelerated growth Q3. And Q4, we will likely buck the trend of a flattish Q4 and actually grow in Q4.

Thanks. Right. Our next question comes from Girish Pai from BOB Capital Markets. Please unmute your line and ask your question. Girish, if you're saying something we can't hear you.

It looks like we are having trouble getting you connected. We will place you back in the queue and return to you later. We'll move to the next question. The next question comes from Abhishek Gupta from Axis Asset Management Company. Please unmute your line and ask your question.

Hello? Am I audible now?

Yes, Abhishek.

Yeah. So I just wanted to check on the two clients which might impact our growth in Q2 as well. What are the kind of work which we are doing for these two clients and wanted to more clarity on the second client which we saw a sharp drawdown, like what is the criticality of the work for that organization? Just wanted to understand how this budgeting is happening within this corporate. Are they looking for that criticality? Are they even considering the criticality of work to ramping down the?

So in this one, so there are two, one is the GSE and the other is, I'll come to the second one. In the first one we are involved in 80% of their transformation programs. Everything that is very core to their business, pricing, underwriting, securitization, forecasting, all of their core systems, we are involved in. Their data, we are the number one, right? In many of these, we are the number one. So in this client, again, I said it a few times, they took a peanut butter spread approach for cuts on day one. They haven't had time to sort through programs, deliver the excellence, criticality, any of that. But they're doing that now. They've started an RFI process that will lead them there, for consolidation that will lead them there. So, that's client one. The client two, we essentially built and finished for them, handed to them what will be the future of their company. It's a platform with four different brands. We did a new architecture to bring these brands and platforms together that'll help reduce development effort and materially improve velocity. So that's the work we did, which we delivered, like I said, usually it'd have continued to additional work, but they are not doing well so they stopped.

Got it, sir. That answered my question. Thank you so much. We have a last question coming from Gaurav Rateria from Morgan Stanley. Please unmute your line and ask your question.

Hi. Congrats on good execution in an uncertain environment. Keech, I just wanted to understand for the deals where you're using your platforms, how are the contracts structured in those cases? Are there different outcome-based models which are being explored versus the effort-based business model that we have always dealt with in the past? Are there any new billing models that are in the works, especially with the advent of generative AI? Just trying to understand how the business model will evolve.

So the old platforms like Tensai is very kind of managed services. The construct hasn't changed. I think incrementally there is Gen AI benefits into those kind of deals and contracts. On the newest, which is RapidX, I think it's evolutionary. We are going to experiment with different models. We're still in early phases. Remember we only brought it to beta at Q4 last year. So, it's early stages. Clearly our attempt is to see what's the best mechanism that will bring us value for the platform beyond the human effort.

All right, thank you.

That brings our Q&A session to a close. I will now hand back to Mr. Srikrishna for closing remarks.

Thank you. Thanks, Dinesh. We actually, like I said in the beginning, in the light of everything that is happening, we had a surprisingly normal quarter. We had actually a number of wins that make us feel good. We have uncertainties around two clients. I think we now know what the bad is, and that's in the books. There's potential significant upsides even with those clients going forward. And otherwise we are in play for a number of very large deals that can change trajectory of growth of a company quite a bit. Even without all of those happening, we will still have a solid Q2. We'd have had a great Q2, but we'll have a solid Q2 and a great Q3. So with that, I look forward to speaking to you again, and like I said in the beginning, I will also provide you an update on our strategic initiatives every quarter. Look forward to the next quarter and look forward to meeting some you offline as well. Thank you. This concludes our conference call. Thank you all for attending.