Edited Transcript of MPHASIS.NSE earnings conference call or presentation 28-May-19 6:30am GMT

By design, the technology consumption pipelines have moved away from big multiyear decisions focused on heavy up-front CapEx style investments and the build-out of on-premise applications, custom or off-the-shelf, to technology consumption that is now mostly done on a pay-as-you-go basis, with measurable results and all the while having the flexibility to continue diverse investments to a business case where the outcomes match the need of the customers. Since our business is a reflection of the way technology is consumed by the enterprise client, this change has huge implications on our future, especially as the pace of change accelerates.

Consider a traditional application outsourcing deal, which called for building a new system over a 3-year period with cycles of dev, test, deployment and production, resulting in a multiyear opportunity. This is now history, enabling us to help build a rapid deployment model starting with a minimum viable product, leading to a business case approval to build further and funding being released in phases with the business choosing to have the option to adapt and adjust the functionality at any point.

While the client business gets more agile this way, the nature of our business changes, demand for new skills increases and the requirements for investment escalates. This dynamic is amplified for all our clients, creating a seismic shift in the way we must plan, manage, run and invest in the business. And this dynamic is not limited to Mphasis alone, but is industry-wide, encompassing all forms of technology companies not only services companies.

Of course, this very disruption comes with unprecedented opportunities. As such, we continue to invest in staying ahead of competitors in positioning ourselves as enablers of the new normal. This, however, does result in many short- to medium-term challenges and the dynamics should be managed with the size of opportunity on one hand and the risk of obsolescence on the other.

Cloud companies like AWS, Google and Azure are accelerating the development of additional capabilities that make the consumption of cloud services far richer as well as accelerate deployment of new software introduction of cloud, providing new opportunities while accelerating disruption of traditional service lines. IT services companies like us need to have a distinct value propositions in cloud, DevOps, native app dev, migration and cloud ops as well as build capabilities across the stack.

We, at Mphasis, have come a long way in managing these dynamics and still have a lot further to go as we continue to navigate the future in helping our clients make the same transition. The next phase will require a combination of skills, scale, smart, maturity and, above all, extreme nimbleness to adjust and adapt. We have used the twin themes of consistency and transformation as we have navigated this journey over the past 2 years.

There’s no better validation than our annual performance that clearly indicates consistent growth. Consolidated gross revenue grew 22.6% on a reported basis and 14.2% in constant currency in FY ’19. This is the highest growth for the company in the past 10 years. Consecutive years of double-digit growth in Direct Core and DXC/HP has helped our transformation and is driving consistent overall growth as we delve deeper into these units in a short while from now. The net revenue for FY ’19 grew 18.2% on a reported basis.

We’ve been able to deliver consistent double-digit growth in both Direct Core and DXC/HP business and an overall margin improvement of 100 basis points in FY ’19. On a quarterly basis in Q4, consolidated revenues grew 2.2% on a reported basis and 2.9% in constant currency terms. Direct Core revenue grew 2.9% Q-o-Q on a reported basis and 3.7% Q-o-Q in constant currency terms. DXC/HP business was flat on a reported basis sequentially and grew 0.4% in constant currency.

Digital Risk business revenue grew this quarter. We also have had significant deal wins from this business in Q4. We are constantly stabilizing our Digital Risk business and bringing this back to a stable revenue band of $20 million to $30 million as we progress through FY ’20. New deal wins, which is another key lead indicator of our sustained growth, continues to see momentum.

In Q4 ’19, Direct International TCV stood at $146 million and totaled $616 million for the full year FY ’19. Of this, 79% of new deal wins are New-Gen Services, showcasing our continuing transformation of service portfolio is right in the middle of driving growth.

On the back of strong revenue performance, the other key financial metrics improved as well. We are pleased with the growth in operating profit. We delivered an increase in operating margin by 100 basis points in FY ’19 and our operating profits grew 25.9%.

Let me reemphasize that this margin growth has been achieved despite headwinds on hedge losses resulting from rupee depreciation and volatility in the Digital Risk businesses. The operating margin for Q4 remains flat at 15.8% due to higher employee benefits and related expenses to some deals in this quarter. We were able to successfully deliver on our optimization plans through the year, and this has given us the headroom to make significant capability investment in Talent Next, NEXTlabs, Stelligent, et cetera.

Further, during FY ’19, we completed another buyback with an outlay of INR 9,949 million, as part of our overall strategy to enhance the shareholder value. The growth in operating profits helped us deliver strong EPS growth for FY ’19 at 31.4% to INR 56.1. With this, I’m pleased to inform that the Board of Directors have recommended a dividend of INR 27 per share, subject to shareholder approval, which gross dividend tax represents a payout of 58% of FY ’19 net profit, consistent with our past practices.

Our operating cash generation remained strong, and total cash on the balance sheet as on 31st March stood at INR 19,854, approximately $287 million.

Now let’s look at the DXC/HP business. Many still have an historic overhang of constant decline in revenues in the period up to FY ’16-’17. This is behind us. We are now encouraged by the continued and healthy growth in this channel. Our strategic client engagement partnership, focusing on capability-backed and solution-led approach to go to market is yielding good results. We won significant large transformation deals with DXC/HP during the year FY ’19. Revenue grew 32% on a reported basis and 22.9% in constant currency, making a consecutive year of 20-plus percent growth in this channel.

Over the past 8 quarters, we’ve purposefully transformed our relationship to stem the decline and make it a growth channel. This, coupled with our current MSA, which runs up to 2027, provides us a powerful platform to continue this journey.

The 3 themes of our transformation, as laid out at the beginning of FY ’18, were: move from a traditional outsourcing to client strategic partner, expand geographical footprint, and be a growth partner by being in the path of revenue for DXC. Let’s see how we have fared in our transformation journey.

As you can see in FY ’16, our footprint was predominantly Americas and in the IPO segment. In FY ’17, we brought on new leadership, addressed the relationship issues and changed our mindsets to that of growth. This is what we call the workforce segment of our business. This resulted in DXC announcing us as the absolute cloud strategic solution partner to transform and modernize enterprise applications for public, private and hybrid cloud. This partnership is built on our ability to deliver faster transformation, lower costs and right skills to transform the business in the digital world. This was the start of the work with segment of our business. This was also a testament to our teams working well with DXC, the consistent delivery track record and NextGen IT offerings brought to the clients built on DXC and Mphasis IP.

In early FY ’18, we won our first services transformation deal engagement, a multiyear complex contract based on delivering business outcomes. Also, we laid the foundations for penetration into Europe, while reestablishing our presence in Australia and U.K.

In FY ’19, we further strengthened our DXC growth partner status by announcement of DXC Mphasis next roadmap, where our teams worked alongside DXC directly in their accounts, expanding application footprint for them. This is the work at segment of our business.

As you see, our transformational business wins is continuing, and currently, we have less than 30% of the work which is traditional outsourcing. The shift is towards outcome-based, multiyear service transformation contracts with up-front investments. Our geographical footprint has expanded, and currently, 1/3 of our revenues are generated from non-American geographies within DXC. All of this is reflected in our compounded quarterly growth rate, which has grown at over 5% over the past 8 quarters.

You will notice transformation, consistency and the maniacal focus towards our clients and they’re in this journey. This is a showcase of Mphasis’ clarity and strategy, relentless execution and testimony to the trust and relationship we’ve built with them.

Based on our transformation track record, we’re in a vantage position to continue our growth by placing the following strategic bets. Let me start with service transformation. The objective of this vector is to partner for DXC in their value-capture journey by reducing their cost of run business.

We extensively deploy automation, cooperative assets of both DXC and Mphasis to achieve contracted outcomes. Naturally, there is a gestation cycle for this investment during deals. This also gives us a good play as DXC looks to reduce nonstrategic vendors and their spend there.

The second vector is to accelerate application growth for DXC. We plan to double down on our work with and work at motions that is provide strategic solutions coverage in select areas and increase coverage for DXC end customers. We also see opportunity in jointly pursuing legacy modernization of client IT estates. Our combined strength put us in good shape to lead this market.

Finally, we’re also expanding our vertical footprint. We have already started with insurance because we believe we have the ability to replicate the Ingenium CoE model that we currently run for DXC for other products. We all know that DXC is a market leader in insurance, and we see potential in this investment. We are also exploring additional vertical-specific areas that could add growth headroom. With the above bets and our past 8 quarter track record, this segment continues to present a growth proposition for us at Mphasis.

Switching to Direct Core segment, which is our primary driver for long-term growth. In our investment thesis laid out at the beginning of FY ’18, we have called out for accelerating Direct Core as a primary vector of long-term growth. Direct Core revenue grew 25.4% on a reported basis and 16.3% in constant currency in FY ’19, which has been the highest growth in this segment ever with the compounded quarterly growth rate accelerating to 4% over the last 8 quarters in a consistent manner. The tremendous success of Direct Core is pivoted around 3 main pillars of growth: strategic customers, Blackstone portfolio, and our new client acquisition group. We are happy to report that all 3 growth engines contributed significantly to our strong result in FY ’19.

Auxiliary accounts are our multi clients who represent a significant portion of our Direct Core business. Over the years, we’ve built on strong relationships and deep domain expertise in our client businesses, which has enabled us to expand our engagement and gain wallet share. Another item that was added was through differentiation in service offerings.

In Blackstone channel, on the back of strong execution of some of the large deals won in FY ’18, this group has almost doubled in revenue and witnessed strong growth we anticipated. We continue to add more clients in this channel and believe there are continued opportunities to that existing Blackstone client base as well as the ever-expanding Blackstone portfolio.

For new client acquisitions, we registered significant revenue growth of over 80% in FY ’19. This has become a strong growth engine contributing meaningfully to the Direct Core growth and is a testimony to our differentiation in the market. As you can see from the data, all 3 segments of Direct Core, as called out in FY ’18 investment thesis, have meaningfully contributed towards acceleration in this segment and the segment is not dependent on any one category, thereby giving us confidence in the continuation of consistent growth themes at above-market rates.

The significant capability built around New-Gen Services helped us deliver strong TCV growth in FY ’19. Direct International business won new deals worth about $616 million TCV with 79% of these wins in New-Gen Services. I’m happy to state that New-Gen Services now contribute 46% of Direct Core revenues in FY ’19, representing a year-over-year growth of 45%.

We’re also building a strong ecosystem of best-in-class partners, such as Amazon Web Services, Pivotal, Esgyn, Camunda, et cetera.

Recently, we were named Gold Partner with Microsoft for Cloud Application Development and have also partnered with Google Cloud for joint-build and GTM. These relationships have enabled us to generate a strong deal flow with 30%, an early portion of our wins, involving the partner ecosystem, especially in New-Gen Services, consistent with the transformation team.

With the knowledge that every business is a digital business, we are proactively providing a roadmap for our clients to help them in their digital transformation journey. Given the current state of enterprise IT and operations businesses, the critical role of enabling our clients for digital IT readiness falls squarely on folks like us. We will continue to expand our offerings across service transformation to help bridge legacy IP to digital IP. Applying automation to all aspects of core IT, from QA to infra to applications becomes the key aspects of this offering.

We launched a unique corporate strategy framework of bringing the feedback into IT as we architected the front-to-back digital transformation approach, our customer-centric transformation framework, involving and providing a hyper-personalized customer experience.

I’m enthused that we have aligned ourselves to some of the megatrends using the front-to-back approach, which lends itself very nicely to the trends of customer in the center of everything. It powers many tenets of true digital experience and, most importantly, through enterprises that are looking to monetize pre-existing IT assets, including legacy.

The approach calls for an alternative, nonintrusive and domain-contextualized approach that leverages on our ever-expanding library of IP assets. Complemented with service transformation framework, this approach prevents a compelling proposition for an end-to-end IT services platform.

Talent is another big area of transformation, and I will cover that separately in a few minutes. As explained above, the way clients are buying technology is fundamentally changing. We made many choices over the past 2 years, and the approach we’ve taken to build the cloud-native company-first business model with investments in areas like platforms and building IP assets using NEXTlabs, Talent Next as well as adopting a client-centric org design, with a clearly defined purpose, continues to give us confidence that we’re on the right track.

This scale builds through strong revenue growth in NextGen services in the past couple of years. We have created core portfolios with the objective of creating truly world-class capabilities in areas such as DevOps, NextGen cloud-native app dev, legacy application modernization, enterprise automation and so on. We continuously scan the market and our client base to explore and evaluate how best to identify areas of further investment and focus.

The application (inaudible) technology is the driver of our success as we relentlessly strive towards becoming world class across all of our focus portfolios. We also decided to apply an agile approach and favored our go-to-market around the portfolio-led Tribe and Squad model. Tribes are cross-functional teams focused on developing, evolving and building NextGen offerings.

Each portfolio Tribe has cross-functional Squads that come together on a need basis to focus on specific milestone development or live deals using agile methodologies. The Tribe/Squad Model has significantly changed the way we engage with our clients, bringing agility and innovation to our engagement. Design thinking, workshops, hackathons and core innovation have become the new normal with our client base.

All of this coming together and becoming real for our clients is extremely important. Let me give you a couple of client examples. Our Modernization Tribe accelerated the pace of legacy modernization for a Fortune 50 company by leveraging cloud-based capabilities and frameworks, including containers. This client had limited time as well as lack of adequate up-front investment funds to transform the core system, thus losing market share to competitors. Post our transformation project, the client has experienced high-velocity phased modernization and the ability to fund the same, while reducing the cost of (inaudible) modernization.

Similarly, leveraging our NexGen App Dev Tribe, we built a cloud-based high-transaction, high-performance global payment system at a Fortune 50 bank. The bank had a large number of organically grown systems but was unable to roll out products fast enough because of risk of losing business to competition. Post the transformation project, the client was able to rapidly scale their daily transaction volume as well as accelerate the speed to launch for new payment products in new territories, both for integrated, high-value and low-value payment transactions. The results speak for themselves.

The creation of IT and reusable artifacts is structured around 3 main areas of focus: cognitive computing, client-centric — cloud-centric solutions and large-scale services transformation. Our innovation labs have built several extremely effective IT assets and have also been recognized by leading analysts and raked up pretty impressive awards. We’re also proud to announce that Mphasis has been now granted our first U.S. patent this year.

Finally, no transformation would be complete without people transformation. Let me give you a brief overview of the same. Talent Next is a company-wide program to build and proactively develop new-gen skills internally. It was launched in FY ’18 with the aim of up-skilling and cross-skilling our workforce, having learners certified on NextGen skills and effective deployment of the same certified tool. That is by reducing fulfillment latency becoming the high-level objective of this program.

Since inception, we have had 5 successful sprints, including the 2 that are currently running. Across them, we’ve had over 60 skill-proficiency solutions.

A large portion of our associates have been certified and continuing to increase their proficiency levels through the continued use of the platform, creating a flywheel of opportunities and fulfillment in new-gen skills. Our focus is about bringing the feedback in IT for talent as well. Our approach to leading solutioning with architecture, engineering and design is paying risk dividends and creating a culture of continuous learning and development.

I would like to take a moment to reflect on the past 2 years of our transformation. Especially, as the list of competitive positioning in the market with above-market growth signaling that our clients are continuing to work for us with their business as well as getting recognition from industry analysts and opinion makers.

Overall, we are pleased with the execution of our strategic priorities of growth this year with strong revenue growth across all major business segments on the back of strong TCV wins.

We’re also pleased with the health of our pipeline, the buildup of our capabilities, both organically and inorganically, which we’ve built across a service offering portfolio, as I just talked about, and our continued strong execution in New-Gen Services.

There are a few metrics that are noteworthy as I’ve discussed over the past few minutes. We will continue to execute on our plan for FY ’20 and beyond with continued focus on our primary growth drivers, Direct Core, where we expect to outgrow the market, as well as DXC/HP where our focus, as discussed, will be on continuous transformation of the relationship so we continue to see growth. Besides that, we will continue to focus on operational execution and margin optimization to fuel growth with expected EBIT in the 15% to 17% range for FY ’20.

I thank you for all your support and interest in Mphasis. And as always, I request the operator to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Gaurav Rateria from Morgan Stanley.

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Gaurav Rateria, Morgan Stanley, Research Division – Research Associate [2]

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Nitin, 3 questions. So, firstly, thanks a lot for a detailed update on the strategy. The first question is on DXC. While we understand that there’s a lot of room for penetrating more into this account and you outlaid many search engines for the future growth. How should one think about the framework of renewal of the MSA relationship in 2021? Can there be any discussion around productivity sharing benefit with the client? Or is this a completely different kind of arrangement where one should not think about a normal contract renewal kind of a thing?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [3]

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Gaurav, thanks for that. Good question. I think as I mentioned in my remarks, the MSA actually is valid until 2027. So there is no MSA renewal clause coming up. The only thing that changes at the end of 5 years, which is in 2021, is the minimum revenue commitment actually goes away. But the MSA doesn’t have to be renewed, MSA will actually automatically renew and be valid until 2027. So I don’t think you should think of a binary event that is coming up that actually risks this channel.

Secondly, as you look at the revenue driving transformation through the GTM partnership, doing deals in, primarily, service transformation, expanding geographically and, more importantly, partnering with them to find new avenues of growth for DXC, I think this is a completely transformed relationship.

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Gaurav Rateria, Morgan Stanley, Research Division – Research Associate [4]

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So fair to say that there will be no such discussion around pricing, et cetera, in 2021 when the MRC goes away?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [5]

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So, Gaurav, again, if I — if you look at — the vector that is driving the growth is multiyear service transformation-type deals, which means: one, we are helping them reduce their cost to serve, which basically means that I bundle a bunch of services on outcome basis, which by definition means that there is no rate card involvement in those deals because we’ve already bundled them as outcome-based deals.

So I think the more we continue to use this vector for growth, the less risk there is for any pricing-related discussion causing disruption. But you and I both know that, in all commercial agreement, there is almost always a possibility of having a pricing discussion, even during the term. So there is no guarantee that there will never be a pricing discussion or ongoing commercial negotiation. But having said that, the reason why we gave this detail to you is because we’re shifting from being just a back office IT services provider to actually being a true partner that is driving long-term growth. And more importantly, giving them the operating leverage they need in their business to execute.

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Gaurav Rateria, Morgan Stanley, Research Division – Research Associate [6]

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Sure. Secondly, on the Direct Core, any trends with respect to what’s happening on the BFSI sector? Any subsegment-wise color on that? And have you seen any behavioral change from clients with respect to pushing all of the deals or taking a longer time to make their decisions?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [7]

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I think the environment for New-Gen Services is pretty healthy. There is definitely more and more appetite for adoption of, as I said, the consumption-driven technology models that becomes — cloud becomes the center of that. There’s definitely not a whole lot of demand in traditional core IT services, the outsourcing deals. So that — there will always be joining deals. But I think for the right set of skills and capability and the ability to adopt new tech, the environment is actually pretty healthy.

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Gaurav Rateria, Morgan Stanley, Research Division – Research Associate [8]

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Okay. Lastly, on the margin side. I think you had laid out a program that is systematically improve margins consecutively for the 3 years, you said. I think this FY ’20 is going to be the third year. In that case, the guidance or the outlook looks to be of a stable margin. Are there any specific headwinds with respect to supply side challenges in the U.S.? You’re baking it in — any details around that will be helpful.

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [9]

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Gaurav, again, we are just at the beginning of the year. I think the thinking is that we’ll continue to find ways to optimize operating efficiencies. But at the same time, continue to invest in building capabilities in the business. So I think it is important to note that we want to keep some leverage with us. On a Y-o-Y basis, I think the trajectory has been what we called out for at the beginning of this transformation journey in FY ’18. And I think, directionally, we are still committed to finding continuous improvement.

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Operator [10]

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(Operator Instructions) The next question is from the line of Nitin Padmanabhan from Investec.

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Nitin Padmanabhan, Investec Bank plc, Research Division – Analyst [11]

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Nitin, initially, in your initial remarks, you had mentioned that there will be certain investments required in line with the changing shape of IT. And in this context, when you say 15% to 17%, I also understand that the hedge gains will be better this time on the revenue line, so now for FY ’20. So in that context, are we suggesting that a part of those would be reinvested? Or how should one think about it?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [12]

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Yes, Thanks, Nitin. I think, again, it’s too early in the year for us to decide where the hedge gain will end up, gain or loss, depending on where the currency stays. You can see from our MD&A, the average has been around 70 for FY ’20. We’re just at about breakeven right now. But yes, the thinking is if we do get some tailwind from hedge gains, that gives us the operating leverage to invest not only in building capability but more importantly in making sure that we’re able to use some of that for investment into some of these large deals.

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Nitin Padmanabhan, Investec Bank plc, Research Division – Analyst [13]

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Sure. And the second question was around — on the DXC business, I think that business has evolved quite a lot since we’d earlier sort of discussed. And there’s 2 things there, one is there is this as and with which you described. If you could just explain what’s the difference between as and with is? And the second is within that, there’s also this increasing share of their own subcon spend in terms of gaining share within that system for us. So if you can split both portions of that and how we have — how should one think about growth there? And, finally, do you think assumptions of a mid-single digit growth in that business is completely misplaced in the context of the opportunity?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [14]

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Sure. So I think you have multiple questions in that but mostly all through DXC. So let me just explain. When we say work for, work with and work as, think of that as an evolving way of representing what Mphasis brings to that partnership. Work for basically is we’re an extension of delivery, not visible to the end customer. Work with means that we jointly go and do solutioning. And work as means there are maybe deals where we are actually exclusively starting to deliver those deals. That basically means that the end customer has good visibility and appreciation of the partnership. Of course, they continue to be DXC customers, and we are very, very respectful of that because that’s the best way for us to build a long-term partnership of trust.

As it relates to the subcon spend, I think we’ve actually turned that headwind into an opportunity because we’ve partnered with them over the last year or so as they started to look at their cost to serve and given them the ability to derive some of those savings through this structured service automation deal, which do require some up-front investment. And there’ll be some volatility on a Q-on-Q basis, especially as it relates to making those investments because some of them do have an element of revalue. And finally, I think, for us, we’ll be happy if we continue to have an at-market type growth for this channel. So that should give you a pretty good directional sense of where we are driving.

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Operator [15]

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The next question is from the line of Mukul Garg from Haitong Securities.

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Mukul Garg, Haitong International Research Limited – Research Analyst [16]

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Nitin, just on the Blackstone, you mentioned that you have doubled the revenues. How do you see the opportunity going forward? Do you think it would be — it would be — you will also be able to reach the 10% revenue kind of share from Blackstone in FY ’20, ’21 or do you think it’s still a bit of a long-term goal for you?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [17]

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So, Mukul, I think, again, this is only the second year. I think, this year, we had a good monetization of the deal we sold early on in the journey in FY ’18. I still think that this is a fairly early-stage in our penetration into the channel. Good news is that, that portfolio of potential clients is a never-ending pool because Blackstone now has over 100 companies that are potential opportunities for us.

So the short answer is the opportunity is fairly long term. We have been fairly diligent about the way we engage, so we don’t create a very long tail. But at the same time, have meaningful partnership type client base in that segment. Again, if you look at it, about 3% of the Direct Core growth came from that channel. It represents about 5% of Direct Core revenue right now. I think we can continue to see that go up meaningfully over the next 2 to 3 years.

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Mukul Garg, Haitong International Research Limited – Research Analyst [18]

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Okay. And on the BFS side. How was the growth this quarter, excluding the additional risk portfolio? What are you seeing — what do you think BFS — is it slowing down compared to what you have seen over the last few quarters? Are there any incremental risks which might — which you end up seeing as you enter FY ’20? And if you can just give some more clarity.

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [19]

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I think it’s been a fairly steady quarter from a BFS portfolio perspective. I think there are segments of banking. There are, obviously, investing more ahead of the digital investments scale, especially consumer-facing payments, wealth management, retail, mortgages. All of them are investing in current digital capabilities. So I think, even if I exclude DR, again, DR has been a good part of that portfolio, so it drives — but I think the growth will be fairly strong. It’s actually above company growth in that segment for us if I look at the core IT business.

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Operator [20]

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The next question is from the line of Ruchi Burde from BOB Capital Markets.

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Ruchi Burde, BOB Capital Markets Limited, Research Division – Research Analyst [21]

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I wanted to check regarding the on-site revenues. So if you look at the 2 data points, there’s a reduction in our on-site headcount by about 200-odd people, however, the growth in on-site revenue was strong in the quarter. So I was curious to know what explain these 2 contrasting data points.

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [22]

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Well, I think the only answer, as you can also see from our disclosure in the MD&A, is that we are getting good pricing lift in — especially in [Asian] areas, and that’s actually reflecting in the revenue contribution going up from on-site, which, of course, is good news because it gives us the operating leverage we need to keep investing in those skills.

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Ruchi Burde, BOB Capital Markets Limited, Research Division – Research Analyst [23]

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And regarding the headcount reduction, was it planned?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [24]

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It was planned because, as I said, we are planning a lot of service transformation type deals that require some element of rebatch, and then we actually transform those deals with either reduction through automation efforts and, in some cases, just by taking — increasing the offshore leverage.

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Ruchi Burde, BOB Capital Markets Limited, Research Division – Research Analyst [25]

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I understand. The second thing I wanted to check is Digital Risk this quarter seems to have more than — well, you mentioned about a couple of deals. So does that give a line of visibility that now revenue would be kind of stable, not fluctuate much as we approach the target band of revenue that you mentioned?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [26]

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Yes. I think the best way to think about it is to think about sequential growth in that business, at least in line with the company growth. That’s the way we are bringing it back to that range.

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Operator [27]

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The next question is from the line of Rahul Jain from Emkay Global.

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Rahul Jain, Emkay Global Financial Services Ltd., Research Division – Senior Research Analyst [28]

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Nitin, congrats on the strong numbers. My question is during the widening approach in newer areas, interesting traction in the existing capabilities in client. Is it fair to say that our growth rate should potentially expand, given now kind of this is getting larger?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [29]

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I think, clearly, the New-Gen Services are driving the growth. Of course, that 40-plus percent year-over-year growth, that’s the primary vector and that’s where we are also selling most deals. So I think the right way to think about it is that we need to continue to transform the balance 50% of the portfolio. And the more we can use things like service transformation or F to B to bundle some of those into transformation deals, the lower the drag will be from the non-growth in the segment of the portfolio, so I think that’s very much the attempt. And that’s why I think if you look at Direct Core, with increasing portion of New-Gen Services, that growth is actually starting to show acceleration as well. So we’ve gone from just about under 10% growth 2 years ago to about 16.5% growth this year. So that’s really the reflection of what we’re discussing.

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Rahul Jain, Emkay Global Financial Services Ltd., Research Division – Senior Research Analyst [30]

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Right. And one thing on the — data have jumped up in this particular quarter. Is it any specific reason? And also, the loan, if you could give any clarity on that.

——————————————————————————–

Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [31]

——————————————————————————–

Surya?

——————————————————————————–

V. Suryanarayanan, Mphasis Limited – Executive VP & CFO [32]

——————————————————————————–

So on the DSO, I think this is again the year-end type of effect as such. But we are confident that quarters coming by we’ll come back to 65 to 70 days of DSO. And the loan is just a packing credit taking advantage of arbitrage of the rates.

——————————————————————————–

Rahul Jain, Emkay Global Financial Services Ltd., Research Division – Senior Research Analyst [33]

——————————————————————————–

Okay. So what is the typical difference we observed on a portfolio basis?

——————————————————————————–

V. Suryanarayanan, Mphasis Limited – Executive VP & CFO [34]

——————————————————————————–

On…

——————————————————————————–

Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [35]

——————————————————————————–

On rates, you mean?

——————————————————————————–

V. Suryanarayanan, Mphasis Limited – Executive VP & CFO [36]

——————————————————————————–

On your loan, you are talking about?

——————————————————————————–

Rahul Jain, Emkay Global Financial Services Ltd., Research Division – Senior Research Analyst [37]

——————————————————————————–

Yes. Loan versus what we earned.

——————————————————————————–

V. Suryanarayanan, Mphasis Limited – Executive VP & CFO [38]

——————————————————————————–

Yes. So there’s a normal spread of about 2% or so.

——————————————————————————–

Rahul Jain, Emkay Global Financial Services Ltd., Research Division – Senior Research Analyst [39]

——————————————————————————–

Okay. Risk-free?

——————————————————————————–

V. Suryanarayanan, Mphasis Limited – Executive VP & CFO [40]

——————————————————————————–

Yes.

——————————————————————————–

Rahul Jain, Emkay Global Financial Services Ltd., Research Division – Senior Research Analyst [41]

——————————————————————————–

Okay. And on profitability. Nitin, if you could see, given the portfolio, the way it is shaping up, do you think there is a like-to-like opportunity of margin expansion or is it a more complex thing? So one should be linking it with the growth rate rather than the mix?

——————————————————————————–

Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [42]

——————————————————————————–

I think it’s a — as you rightly said, there are multiple moving parts. I think, directionally, we would love to continue to work towards the continuous improvement in operating margin profile. As I said, I think it’s a little early in the year. We want to see the first quarter or 2 to see how we can balance the dynamic. I think the one thing that we’re really focused on is continuous investment in building capability because that’s the only way we can keep our differentiation going and the momentum of competitive wins in clients where the intensity, obviously, is fairly high. So I think, to me, those are the 2 major dynamics that we continue to manage. Nothing specific to call out for, of course, there is always going to be pressure on finding the right skills in the right market for the right price, but that’s very much part of what we do to balance the business every quarter.

——————————————————————————–

Rahul Jain, Emkay Global Financial Services Ltd., Research Division – Senior Research Analyst [43]

——————————————————————————–

Okay. And, lastly, if I can squeeze in one. The TCV data, I mean, it’s strong, it’s a much larger number than what it used to be till FY ’17. But looking at it from a pure growth-to-growth basis, I mean how we try — how can we try and read this number in absolute as well as growth, trying to compare it with the revenue number?

——————————————————————————–

Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [44]

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Yes. I mean, again, there is, obviously, a correlation between TCV wins and revenue growth. But keep in mind, some of these deals — not all of these deals are the same duration and the same type of business. So some of them are lumpy, some of them are digital projects that get consumed fairly quickly and the others obviously are longer-term deals. So, yes, there is a correlation, but the fact that we continue to see healthy wins in regional areas should give us the confidence that actually bodes well for the growth of Direct Core at above-market rates.

——————————————————————————–

Rahul Jain, Emkay Global Financial Services Ltd., Research Division – Senior Research Analyst [45]

——————————————————————————–

But then this number, in a way, on a broad lens should be seen on an annual basis or the GTM business should be seen as growth what ideally we should do around for the digital — for the Direct Channel basis?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [46]

——————————————————————————–

Not necessarily. B2B growth, 14% doesn’t mean that will transfer to 14% revenue growth in the next 1 year because some of these deals may be 1 year in duration, some may be 3 years in duration, some may be 5 years in duration. So I wish there was a better way for me to give you a complete breakdown of TCV, but that’s the reality of our business. Good news, though, is that we don’t include renewals in the TCV wins. So at least you get a very clear idea of how we are doing in winning new deals. So I think if you can use that in the guidelines, that at least gives you a good sense of the growth momentum.

——————————————————————————–

Operator [47]

——————————————————————————–

The next question is from the line of Sumeet Jain from Goldman Sachs.

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Sumeet Jain, Goldman Sachs Group Inc., Research Division – Equity Analyst [48]

——————————————————————————–

So, Nitin, firstly, wanted to ask around the DXC channel. I mean in the last 2 years, you’ve won some really large transformation-related deals. So how do you see the pipeline of such deals in FY ’20 because the DXC has called out a very long-term plan of margin improvement? So how do you see the pipeline for that in FY ’20?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [49]

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So, Sumeet, let me answer that question slightly differently. The opportunity within that partnership to help them reduce their cost to serve is actually fairly large. The only limiting factor is how much of that can be absorbed in any given quarter, given some of the investments required and, in many cases, just to manage the operational risk of the business as well. So I think the limitation is not so much on the opportunity. And to be very fair, I think DXC has been a great partner in giving us very good visibility into their plans and their areas of focus. Question really is how much of that can we continue to execute and monetize. Keeping in mind not only the operational risks and the deal dynamics, but also just broadly continue to focus on the fact that we want to continue to also find good growth outside of that channel, so we manage the concentration risk a little bit better.

——————————————————————————–

Sumeet Jain, Goldman Sachs Group Inc., Research Division – Equity Analyst [50]

——————————————————————————–

Got it. Got it. And also, DXC has called out they are doing a lot of vendor consolidation at their end and doing quite a lot of in-sourcing. And based on our growth with DXC channel, that’s clearly visible we have gained market share within that vendor base. So how do you see that — actually, the markets share gains totally will continue in FY ’20, FY ’21?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [51]

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Yes. I think, Sumeet, they are suspended over $3 billion. We are still under 10% of that spend. Even if they decide to continue to use multiple levers, such as in-sourcing, I think that the opportunity of that spend is so high that we think we can continue to find growth. So I don’t see that as competitive because I think, just from a share perspective, there is a lot more to do. The question really is how can we execute that in a way that is valuable to us.

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Sumeet Jain, Goldman Sachs Group Inc., Research Division – Equity Analyst [52]

——————————————————————————–

Got it. Got it. And also, I mean, regarding your client concentration if I look at the last 8 to 10 quarters, your top client, top 5, top 10 client concentration has been consistently going up. I mean it does come with a margin benefit, but how do you see that risk panning out over the next few years?

——————————————————————————–

Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [53]

——————————————————————————–

So again, Sumeet, this is an issue we discussed extensively internally. But as transformation and new gen becomes the primary norm, it is natural to assume that clients, where we have tribal knowledge, domain knowledge of their systems, understanding of their parities, relationships, we’ll probably be the first ones to adopt and bring us into some of those transformation deals.

And I think it’s the right way to do it because if your existing clients don’t buy new things from you, then I think it’s very hard to go to the market with completely new things (inaudible). So I think it’s a great reference point. It’s a great way to expand on our wallet share. And most importantly, it’s a great validation of the fact that we have a set of services that our existing clients find useful. So net-net, I think we are very happy with the growth. It’s very much part of our strategy. It’s not accidental. And most importantly, we are completely focused on making sure that we stay very strategic with these clients.

——————————————————————————–

Sumeet Jain, Goldman Sachs Group Inc., Research Division – Equity Analyst [54]

——————————————————————————–

Got it. And lastly, how do you see the tech budgets starting out at these top clients for FY ’20?

——————————————————————————–

Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [55]

——————————————————————————–

I think there’s a 2-part answer to that as I also earlier mentioned. I think most of the growth is only in transformation or engagements that improve their customer experience, agility. And in some cases, it gives them the ability to launch services and products much faster. And I think, by definition, that means that things like investment in CapEx-driven IT projects is virtually nonexistent. Almost across the board, we are seeing a reduction in spend areas like data centers. They’re very constant, committed and focused on driving out operational expenses through adopting automation. And more often than not, these 2 teams will continue to play out. So from a spend perspective, good spend, good growth in areas where it impacts their end consumer. But really, no spend or no growth or no pricing power in traditional older-type deals.

——————————————————————————–

Operator [56]

——————————————————————————–

The next question is from the line of Madhu Babu from Centrum Broking.

——————————————————————————–

Madhu Babu, Centrum Broking Limited, Research Division – Research Analyst [57]

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Sir, apart from the BFSI data vertical, the travel logistics, so how has been the large deal wins? And would you start carving out them as a separate vertical? I mean considering that, as you said, they’re a different skill?

——————————————————————————–

Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [58]

——————————————————————————–

Yes. I think we are tracking that internally. We, obviously, talked about seeding some new areas. Also, all of that is right now sitting in that — in the emerging industries. There is travel logistics, there is health care, there is high tech. So I think as we get a little bit more scale individually in those, we might start carving them out maybe towards the later part of this year.

——————————————————————————–

Madhu Babu, Centrum Broking Limited, Research Division – Research Analyst [59]

——————————————————————————–

And in terms of capital allocation, I think we have been slow on acquisitions barring one we did last quarter. So if at all we require acquisition, which are the areas where we believe that we need to spend and what could be the size of the acquisition? Or would we continue to prefer the buyback route in terms of giving out money to shareholders, buyback and dividend?

——————————————————————————–

Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [60]

——————————————————————————–

Dividend is something that we’ve consistently kept. Buyback is almost always on an opportunity or use-of-cash basis. So at this point in time, anyway as we just finished a buyback 4 or 5 months ago, so there is no possibility of — for another 12 months or so. So as things open up from our ability to do something, we will consider it and the Board will evaluate it. But on the M&A side, I think we’ve been fairly focused on finding tuck-in capability-driven acquisitions, things like Stelligent that give us very strong leading capability in areas along the vectors of the investments that I talked about, whether it’s DevOps, cloud native app dev, modernization and enterprise automation and the like. So I think, right now, the thinking is much more capability-driven tuck-in acquisitions. And I think there’s another $200-odd million even after the dividend in our — cash in our balance sheet. I think we are fairly well-placed for that.

——————————————————————————–

Madhu Babu, Centrum Broking Limited, Research Division – Research Analyst [61]

——————————————————————————–

And, sir, one last one. On the subsegment within the New Gen. Is it more cloud migration and apps in the cloud that kind of what we’re winning or is it on the user experience transformation, CX transformation, et cetera? Which are the subsegments?

——————————————————————————–

Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [62]

——————————————————————————–

Yes. I think subsegment-wise if you look at the conceptual framework of what we define as front-to-back digital transformation, I think there are 3 core elements. Clearly, there is a lot of investment going in deploying technology in front of the consumer. It’s not just user design, but actually, it’s making the interface much more cognitive and intuitive, and in many cases, contactless. So it goes beyond just design. It’s all about infusing technology and AI embedded in the interface itself. A good example of that is things like voice, facial recognition, motion detection. And in many cases, we are using a combination of these sectors.

Then another huge area of investment is really in the entire personalization that is driven by data in motion. That involves gathering data from transactions, pulling data out of the core systems. And of course, using that data we derive insight, and in many cases, create propositions in real time in many cases on the fly, for the end consumer. So I think the investment is really, really big in these 2 areas. And of course, the final area of investment as it relates to new-gen skills is the whole rearchitecting our application base with microservices which then starts to get into the whole application modernization area.

——————————————————————————–

Operator [63]

——————————————————————————–

The next question is from the line of Ravi Menon from Elara Capital.

——————————————————————————–

Ravi Menon, Elara Securities (India) Private Limited, Research Division – VP of IT Services & Internet and Analyst [64]

——————————————————————————–

Congrats on a decent quarter. Just segmental margin for IT communication and entertainment. That’s declined nearly 60, 70 basis points Q-o-Q, but other segments that’s been pretty decent, just down about 100 basis points or so. So what’s led to the sharp decline and the segmental margin for IT, communication and entertainment?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [65]

——————————————————————————–

Again, we explained that, in many cases, there are certain transformation deals that require an up-front investment, and those, obviously, have an in-quarter impact. As we transform those — in this quarter, it happened to be in that segment. And as we transform those by either applying extreme automation or by offshore migration, you will see some of that come back into the margins. So I think the right thing will be to focus on slightly longer-term trend versus just the quarter-to-quarter trend in each segment or even actually for the overall margin trajectory.

——————————————————————————–

Ravi Menon, Elara Securities (India) Private Limited, Research Division – VP of IT Services & Internet and Analyst [66]

——————————————————————————–

Right. But just thinking about what you said, the utilization has been flat Q-o-Q. So should we say that utilization for this particular segment was much lower? Or how should we think about that?

——————————————————————————–

Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [67]

——————————————————————————–

Not really, I don’t think it’s a utilization issue. I think — think of it as a signing a new deal that require an element of revaluing unfair resources that come at a lower margin and a higher cost. And then as you apply that transformation, that will shift.

——————————————————————————–

Ravi Menon, Elara Securities (India) Private Limited, Research Division – VP of IT Services & Internet and Analyst [68]

——————————————————————————–

Got it. Okay. And DXC itself, that’s struggling to achieve market growth. So how long do you expect to continue growing this channel? Would it be like 2, 3 years? Or do you think that there is, at some point, would you say that they would grow, should you actually not grow anymore with them?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [69]

——————————————————————————–

So, Ravi, I think I gave a fairly detailed update on what we are doing to drive their transformation. I don’t think going back to a mindset that we don’t want growth in any segment of the business is the right mindset to take because that adds new risks. And not wanting growth doesn’t take the risk away on anything. And if anything, by having a growth mindset, we can actually manage a lot of the other risks. So I think that’s the mindset we are going with. I mean 2, 3 years is long term in the business is the way that things have evolved and changed, especially introduction of new tech.

So I think my advice will be to not over analyze and complicate the thinking in long term, you know, what happens after 3 years type discussion. Of course, we have to continue this transformation. We are very much a work in progress when it comes to many parts of the business. And from that perspective, focus on the 2 themes that I talked about, which is consistency and transformation.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division – VP of IT Services & Internet and Analyst [70]

——————————————————————————–

Sure. And one last question on G&A. That’s come down quite significantly to just about 4.1% of revenue. So do you see further scope optimization there? Or should we see this slight (inaudible)?

——————————————————————————–

Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [71]

——————————————————————————–

I think we are fairly well-optimized on that front already. I wouldn’t expect that to go down any further. In fact, we may even see a little bit of an uptick there only because I think we have to kind of use various levers that we have to manage the Q-o-Q impact, but I think we are fairly well optimized.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division – VP of IT Services & Internet and Analyst [72]

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Okay. And if I could just add one more there, do you think that you need to add someone on-site facilities, given all this talent-type issues there?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [73]

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I don’t think facilities solve the talent problem, to be honest, because just having an on-site facility doesn’t necessarily open up the talent pool. We are very, very nimble about making decisions on where to invest in having our own facilities, clearing co-location centers, opening client-dedicated OTCs. And I think we are already present in multiple geographies worldwide, following that principle. So as I said, on a need basis, we are very nimble in making decisions.

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Operator [74]

——————————————————————————–

The next question is from the line of Rishi Jhunjhunwala from India Infoline.

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Rishi Jhunjhunwala, IIFL Research – VP [75]

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Nitin, just quickly, if you can tell again in terms of what’s the growth outlook we are looking for in case of DXC and what is the likely margins that you are looking for next year even if not an absolute number, but directionally?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [76]

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So, Rishi, I think I talked about the EBIT guidance we’ve actually maintained in the 15% to 17% range. We came out at 16.1% for FY ’19. As I said, I think there are a few things that we want to watch out for in the next quarter or 2 to give you any updates on that. For now, we are maintaining the same guidance range.

On growth, I think I was, again, fairly consistent as I have been. And I think we continue to feel that the Direct Core growth will be the leading driver. We’ll continue to find above-market growth in that business. And I think our aspiration for the DXC/HP business is to at least have at market growth.

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Rishi Jhunjhunwala, IIFL Research – VP [77]

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Okay. So on the margin side, so when you look at the margin range, do you bake in — how do you treat your ForEx gains and losses, right? So you have hedged book already for the next 12 to 18 months with an average hedge rate of about 72.1%. So on the flip side, if I say, for FY ’19, excluding your ForEx losses, your EBIT margins are actually 17.1%. So when you look at 15% to 17%, are you baking in the gains that could possibly come assuming currency remains constant? Or how do you factor that in?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [78]

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Yes. Go ahead, Surya.

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V. Suryanarayanan, Mphasis Limited – Executive VP & CFO [79]

——————————————————————————–

Yes. So, Rishi, as you said, we do have the hedge at around average rate of 72. But for FY ’20, it is around 71% because, as you know, we do a 2-year layered hedge. Now keeping in mind the — of course, we’ve had tailwinds because of the hedge realization for FY ’20. But at the same time, as Nitin had mentioned earlier, we are also making a lot of investments on the talent banks in training and investment on platform and tools. So as of now, for the time being, we’re keeping the forecast guideline for the margin within 15% to 17%. And after a couple of quarters, actually, move along, we’ll come back with any revised range, if required, at that point of time.

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Rishi Jhunjhunwala, IIFL Research – VP [80]

——————————————————————————–

Okay. And on DXC, you mentioned at industry rate, and you’re already growing at this point of time at 20%. So just wondering, I mean, that looks like a multiyear deceleration in the year-on-year growth. Of course, it comes off a pretty high base as well. But do you see that outlook that provided with a sense of conservatism or that’s how you think it will play out?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [81]

——————————————————————————–

So, Rishi, again, I think there is obviously going to be growth built into the run rate. So I mean, it is easy math to do. Even if we stay flat for the next 2 quarters, you’ll still see growth because, clearly, on a Y-o-Y basis, you will still find undergrowth.

When we say that our aspiration is to grow at least at, that basically means that we don’t want that channel to dilute the company growth. And now for the last 2 years, we’ve actually seen really very strong growth. All I’m guiding towards is I don’t expect another 20-plus percent year growth in that segment because, one, the base effect is higher; and two, I think we want to manage some of the dynamics that I talked about and continue to shift our focus on accelerating the Direct Core business. So I think from that perspective, don’t read that as a guidance that as growth will be accelerating or we have a problem at hand, but I think it’s just from a point of view of managing the portfolio and making sure that, at the very least, we use that channel to stay growth-accretive.

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Operator [82]

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The next question is from the line of Ashish Chopra from Motilal Oswal Securities.

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Ashish Chopra, Motilal Oswal Securities Limited, Research Division – Research Analyst [83]

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Nitin, I just wanted your help in understanding how the visibility compared when we look at the Direct Channel vis-à-vis the DXC channel. So like the TCV that you give up net new wins of $616 million with an average duration that you may have. Does DXC also offer a visibility of similar sorts or does the fact that some of this would be their own orders for their customers that would make it slightly challenging? Or given that some of the major of the world being subcontracting may come in at a point of time without you having much visibility on that? Just wanted some color there.

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [84]

——————————————————————————–

So, Ashish, the dynamic is a little bit more complex, of course, at DXC because, in a way, whether we’re doing work for, work with or work at, onset or not, it’s — the end customer contracts are with DXC. So yes, that adds a little bit of complexity. And the way we manage that dynamic is by making sure that if we have visibility into some of the runoff, we find business to refill because the opportunity, as I said, is still fairly large given that we are still less than double digits in the spend with partners. So I think we basically use that to manage and make sure that from a sequential basis, we continue to find growth.

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Ashish Chopra, Motilal Oswal Securities Limited, Research Division – Research Analyst [85]

——————————————————————————–

Got it. And just one bookkeeping from my end. If you could share the attrition rate, then how would that have compared maybe a year ago?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [86]

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Attrition rate is actually nothing to call out for. It’s fairly consistent. We’ve not seen any major spike, especially given the investments we are making in Talent Next, that’s actually been a fairly successful program.

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Operator [87]

——————————————————————————–

The next question is from the line of Apurva Prasad from HDFC Securities.

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Apurva Prasad, HDFC Securities Limited, Research Division – Research Analyst [88]

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Congrats on a strong quarter. Nitin, would — the TCV — the duration of the deal wins, this year FY ’19, would that be different from the deal wins that you had in FY ’18? Because I’m seeing — I mean the New Gen composition seems to be similar.

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [89]

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Apurva, not in a dramatic manner because, again, I think there is certain deals that are more lumpy and there are certain that are slightly more longer term. But I think, on an average, 2 to 3 years is a fairly consistent way to think about it.

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Apurva Prasad, HDFC Securities Limited, Research Division – Research Analyst [90]

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So would that be the duration on FY ’19, 2 to 3 years?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [91]

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On an average, yes.

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Apurva Prasad, HDFC Securities Limited, Research Division – Research Analyst [92]

——————————————————————————–

All right. Okay. And in the ROW region, anything that’s driving growth? So that’s obviously coming off — coming — growing pretty strong.

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [93]

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I think some of these are global accounts, so the way we classify that is business from that region, clearly, again, small base. So I wouldn’t — again, I talked about growth in DXC, outside of the Americas, some of that is being driven through that channel as well.

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Apurva Prasad, HDFC Securities Limited, Research Division – Research Analyst [94]

——————————————————————————–

Right. And just a bookkeeping one on the Digital Risk revenue for the quarter, if you can help me?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [95]

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For the current quarter?

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Apurva Prasad, HDFC Securities Limited, Research Division – Research Analyst [96]

——————————————————————————–

Yes.

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [97]

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Yes. I don’t think we’ll give you guidance quarter-by-quarter. But as I mentioned, you can expect at least in line with company sequential growth through the year for Digital Risk.

——————————————————————————–

Apurva Prasad, HDFC Securities Limited, Research Division – Research Analyst [98]

——————————————————————————–

And the number for the quarter, Digital Risk?

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V. Suryanarayanan, Mphasis Limited – Executive VP & CFO [99]

——————————————————————————–

It’s around [23.5].

——————————————————————————–

Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [100]

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For Q4, okay.

——————————————————————————–

V. Suryanarayanan, Mphasis Limited – Executive VP & CFO [101]

——————————————————————————–

Q4.

——————————————————————————–

Operator [102]

——————————————————————————–

The next question is from the line of Nitin Padmanabhan from Investec.

——————————————————————————–

Nitin Padmanabhan, Investec Bank plc, Research Division – Analyst [103]

——————————————————————————–

So I actually have a couple. One is, still, a lot of banks appear to be talking about in-sourcing and sort of catching outsourcing and so on and so forth. So in that context, within our banking clients, do we see any of those kind of commentary actually impacting us in any way?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [104]

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So, Nitin, again, when you look at commoditized legacy, traditional type work, that dynamic is at play. But keep in mind, one of the primary vectors of using partners like us for banks is to actually bring us in for transformation deals because that’s where they are also looking for ideas, health and innovation. So you can tie that back directly to the earlier comment I made about where growth is in banking. The growth is really in New-Gen Services because that’s where they’re looking for ideas and help.

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Nitin Padmanabhan, Investec Bank plc, Research Division – Analyst [105]

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Sure. The second one was on the drop in gross margin this quarter. You did allude to the fact that it’s because of people causing some deal-related costs. So there’s nothing to do with the compensation increase this quarter, right? It will be all deal-related because, on the earlier comment, the onset had kind of come down. But it’s quite unusual to see the drops that we have seen in the Q4 for us. So just a little more color on the gross margin and how much is recoverable?

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [106]

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Yes. I think it’s mostly to do with deal dynamics. And again, I also alluded to the fact that we continue to make investments in our existing program. So the way we are thinking about it is to make sure that, as we expand that talent pool, we also have to put in place retention measures. I think some of that you will see product loss some quarters. But in most cases, what you’re seeing in Q4 is really deal-related.

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Nitin Padmanabhan, Investec Bank plc, Research Division – Analyst [107]

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Sure. And, lastly, I think this further point for the broader audience as well. There’s a lease accounting change that is out there on rental. And from what I understand, our rentals are relatively higher than the peer group. So in that context, if you could just explain the potential impact there and what is — how does this actually — this accounting change actually work?

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V. Suryanarayanan, Mphasis Limited – Executive VP & CFO [108]

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Sure. Nitin, in days 116 is applicable from 1st April of 2019. So we are working out the impact. But based on the initial destination, we are not seeing any major impact on the EBIT or net profit. It is just a shift between the rental into depreciation, amortization and interest component. We’ll come out with the details during our quarter 1 earnings call. But as I mentioned, the impact is very marginal.

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [109]

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Okay, operator, we need to close this call. Yes.

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Operator [110]

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Would you — I now hand the conference over to the management for closing comments.

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Nitin Omprakash Rakesh, Mphasis Limited – CEO & Executive Director [111]

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Thank you, everyone, for your interest and continued appreciation of our work. We look forward to talking to you in the next quarter. Thank you all.

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Operator [112]

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