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Ladies and gentlemen, good day, and welcome to the eClerx Services Limited Q2 FY'19 earnings conference call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rohitash Gupta from eClerx Services limited. Thank you, and over to you, Mr. Gupta.
Thank you. Good evening, everyone. Thank you for joining eClerx earning call for the second fiscal quarter of FY '19 ending 30th September. In Q2, we saw sequential increase in dollar revenue by about 1.6% to $50 million, while our Y-o-Y dollar revenue risen with an acceleration from 0.9% in Q1 to 3.5% in Q2. The sequential growth in constant currency stood at 2.2%. We saw a modest increase in offshore dollar revenue sequentially, but it decreased marginally on Y-o-Y basis. On the other hand, our efforts on building onshore revenues continued to result in healthy Y-o-Y growth of about 30% this quarter. This Q2 was our fourth consecutive quarter with Y-o-Y dollar revenue increase after 5 prior quarters of continuous Y-o-Y dollar decline. INR operating revenues increased by 8% Y-o-Y, accelerating from 6% Y-o-Y in Q1. INR operating revenues increased by 1% on sequential basis to INR 3,559 million despite accommodating INR 77 million sequential decrease is SEIS income and INR 15 million decline due to lower hedge realization rates. The operating margin for Q2 stood at INR 728 million, an increase of 6% sequentially, but a decline of 13% on Y-o-Y basis. Profit after tax in quarter 2 was at INR 699 million, witnessing a strong 16% increase since last quarter. Other income for the quarter increased by about INR 8 million, due to revaluation and realized gains because of INR depreciation against the USD. Our forward hedge book of about USD 151 million is at an average rate of INR 70.5 to USD 1, a rate that has increased by about 120 paisa since last quarter, primarily due to recently booked hedges at higher spot rates. We have hit our lowest hedge realization rate in Q2 and this rate will modestly increase in H2 and will show significant increase from next FY. The operating margin percentage increased by 90 bps this quarter, as global delivery and support model optimization efforts played out as expected, supported by reduction in travel cost and one-time accounting benefit of Pune facility consolidation initiatives. All 3 of which helped more than offset the 2 headwinds that I described earlier of INR 92 million in the quarter, due to lower SEIS accrual and lower hedge realization rate. SG&A put together contributed to operating margin increase by about 70 bps sequential basis, while depreciation increase contributed to 20 bps of OPM decrease. We have about INR 6,531 million cash and cash equivalent at the end of September, which increased by INR 464 million since Q1. The net operating cash flow during the quarter jumped back to healthy levels of INR 937 million. We have spent around INR 64 million on CapEx in Q2, which is higher than Q1 amount as we have recently started on previously announced Fayetteville expansion and Pune facility consolidation. The CapEx will keep increasing over next 3, 4 quarters with total one-time CapEx budget of INR 300 million during FY '19, and any project overrun will get into Q1. This CapEx has started showing minor impacts on depreciation in Q2, and this impact is likely to peak around Q1 of FY '20. On balance sheet, the only significant change is an increase of deferred tax assets, which in turn is due to MTM loss on hedges, given the current depreciation. We have spent around INR 24 million on various CSR activities during the quarter, including catch-up on unspent budget from Q1. eClerx and its employees have also supported flood and hurricane rehabilitation efforts in southern India and North Carolina, respectively. Our ESOP trust, which began operation in 2016, has accumulated about 705,000 shares at an average price of INR 1,268. Shareholders have approved a further loan of about INR 60 crores to the trust to continue the market purchase activity. In line with our stated approach, we have distributed about 53% of our last 12 quarters cumulative PAT in form of dividends or buybacks, and we will continue to follow a similar approach in future. The DSO this quarter was about 89 days, which has improved significantly since the last quarter. Additionally, since our top 10 clients' accounts payable process have stabilized now, we have started certain initiatives to bring further improvement to the DSO by the year end. Most of the revenue concentration and utilization metrics have remained same as last quarter. In addition to the continued growth in onshore revenue, managed services growth has also panned out as per our longer-term strategy and it now contributes to more than a quarter of our revenue. A very satisfactory achievement here is that all the 3 verticals have increased managed services book by similar percentages over the last year. Two of the clients, one is from financial market and retail, have moved from INR 0.5 million to INR 1 million revenue bucket. Revenue of top 10 clients have entered into positive Y-o-Y growth trajectory after many quarters of continuous Y-o-Y decline. Emerging clients growth, albeit still in comfortable double-digits, has moderated temporarily. The emerging client revenues in both INR 0.5 million plus bucket and the rest remains volatile due to higher mix of project business. The company employee strength has increased Y-o-Y to 9,583, with an increase of 161 coming from offshore delivery team, partly to offset increased attrition. Our onshore staff, mainly in Fayetteville and consulting business, has increased by 87, in line with the onshore revenue growth. Our sales and business development staff count has increased since last quarter from 78 to 86. The India attrition has increased sequentially to 42%, with most of the increase coming from execution level while our high-performance managers and subject matter expert attrition is now a near multiyear low. Our effective tax rate for H1 has moderated to 27.5% and we expect our FY '19 ETR to be between 28% to 30%. The demand environment for our services has remained very strong as our H1 new sales have been highest ever in any 6 months period, with our pipeline conversion rates across all verticals increasing on Y-o-Y basis. Our revenue for the employee has been rising continuously across last 6 quarters, most notably in digital, as they become integral part of our client's digital initiative through our consulting practice. An interesting emerging trend is that these sizes of our new logo wins have increased substantially, demonstrating the recognition of our niche positioning in a more competitive new client landscape. As we see a lot of positives in our demand environment, we also feel that pace of roll-offs, an expectation of higher productivity on legacy work, remains high, resulting in relatively tepid revenue growth. Count of deployed ROBOWORX bots has increased by more than 50% and machine learning projects have grown 4x on a year-over-year basis. Overall, we are confident that with broad-based demand, tailwind of currency, strong execution on new deals, increasing mix of managed services, onshore consulting, analytics, robotics and machine learning, we are strongly positioned to capture increasing mind and revenue share from our clients while maintaining or improving profitability. With this, I will hand over the call back for Q&A.
[Operator Instructions] The first question is from the line of Ruchi Burde from Bank of Baroda Capital Markets.
Could you update us regarding your new on-site facility, which was prior due to come up?
Sure. As I mentioned, Ruchi. We have had our Fayetteville facility during last, more than 12 months. What we did the increased space by hiring the nearby space of the existing facility. And that's what has almost come to completion, so which means that we have started hiring new people to fill up and train the people who will sit in this new leased space. So that is, I think, work in progress, but as we speak, this is nearly done.
On site headcount increase that we see is happening for the extended -- this newly extended facility or it was on the...
[indiscernible] of this, plus there is also a little bit increase in digital consulting facilities onshore.
Okay. That's helpful. Secondly, now you had mentioned that a substantial increase in profitability would largely hinge on how we can derive offshore revenue, even as our on-site revenue continue to increase. In your prepared comment, you mentioned that now we look for improving profitability going ahead. So do we have visibility for higher offshore revenue growth from here onward?
Hi, this is PD, I think as Rohitash mentioned, at the moment we're seeing more demand for onshore work for a variety of reasons than offshore. So the off-shore book is roughly flat year-over-year, most of the growth has come in onshore and other new services. I think as we go forward, we do see some growth offshore as well, but I think we see stronger demand growth for onshore services. However, I think, sort of given the trajectory of the current currency, we do expect profitability to improve as a result especially come next year, when our realization rate should improve substantially from what we've seen in FY '19 so far. So I think the currency will be one driver of slightly improving offshore profitability over the next 18 to 24 months.
Next question, over the time, in the recent quarter, we have seen on-site revenue mix for you guys increasing. But in tandem your now managed services proportion of books has also increased. Now given that it's been quite a while, is it reasonable to assume that maturity of those managed services would be of a significant margin lever going ahead?
Ruchi, it depends on the area, but generally speaking, you are right, that in the chosen area like for example, KYC or any other such nearly productized areas, the managed services work has started to reach maturity, where we are working on managed services projects across multiple clients for the same area. And we have the tools, whether it's automation or robots or machine learning-type initiatives, which are deployed for that. And we expect that as business grows further in those chosen areas, [indiscernible] margin lever.
[Operator Instructions] The next question is from the line of Vishal Desai from Axis capital.
Just to recap in terms of our outlook which we had laid out in Q1, we had mentioned that in H2, we are likely to see probably a growth revival. But I guess, from Rohitash's prepared comments, I -- we still see the risk of roll-offs as well as automation led threats on our legacy business. Could you spell out in terms of how are we seeing H2 shape up in the coming quarters?
So Vishal, what I have told is the factual things that we have seen in H1, which includes the roll-offs that we have seen of legacy offshore business, and as PD was also alluding, on offshore dollar revenue basis, it has remained almost flat year-over-year. So as of now, we are seeing higher roll-offs to continue. But in future, we think that this space will come down as our mix of legacy projects and legacy we define typically by SOWs which are more than 5 years plus old, has been decreasing. So that threat for the roll-offs is basically continuously decreasing as we speak.
Sure. Could you help me with the ballpark figure in terms of how much portion of our revenue would be on the legacy side of the business?
As I said, we are defining legacy in a convenient age fashion, and it's -- not necessarily works always in that manner because the underlying work and tool sets keeps on changing. But if we were to take a very hardcore definition of 5 year plus, the mix is roughly 50% of the total revenue.
Sure. And in terms of the positives going into H2, could we have an update in terms of how is the outlook shaping up in terms of the three verticals?
Hi, this is PD. So I think we continue to see good demand across all the three businesses, which is what helped us sort of replace all the revenue loss because of either roll offs or automation. I think last year, as we've said last financial year, we saw a lot of roll-offs on the cable side, this year that slowed down. So we see good net growth on the cable business, and I think also on financial and digital we'll see some growth. So I'd say, if I had to pick one, I would say strongest momentum is probably on the customer operations or cable business, and the other two, still positive momentum but maybe not as strong, in terms of net growth.
Sure, and last one from my side, given that pretty much all our revenue growth which we are expecting from the commentary that you guys are stating out, is likely to be driven from on-site location going forward. Is it fair to assume that margin growth from your -- would be largely led by operating efficiencies in terms of SG&A rationalization, rather than any kind of an offshore shift or do we see any scope for further levers or any kind of margin improvement from here on?
I don't think that the proportion of onshore revenue is going to come down. If there's anything, in fact, it might go up a little bit, because we see more traction in the near term for onshore work. Having said that, as I shared in response to a previous question, I think one tailwind that we do expect to get some benefit from is the recent INR depreciation, which after a gap of maybe 3 or 4 years will help us offset some of the accumulated impact of wage inflation that we have seen over that period. So in terms of factors that might improve profitability, let's say 12 months from now, as better hedges start factoring into our P&L, I think currency would be one big one.
[Operator Instructions] The next question is from the line of Abhishek [ Shah ] from [ Icarus ] Securities.
The year-on-year growth in the top 10 was reassuring after almost 5, 6 quarters. So if you can elaborate on the visibility going ahead for the next 3, 4 quarters?
It's hard for me to give you a firm number, but I will say qualitatively, I think that the broader trend of the emerging accounts going faster than the top 5, top 10 will not change. So the numbers may move up and down a little bit, but I think we continue to expect a larger part of our growth to come from our non-top 10 accounts. This in a way is tied to sort of long-running strategic goal of ours, in terms of de-risking the business. So that top 5 -- sorry -- the top 10 gross number might be low single-digit, positive one quarter, may even be flat or negative in another quarter. But it's not going to be very, super strong, I think that's pretty much clear. I think we do expect to see more growth continue on the emerging accounts.
That's helpful. And secondly, in the prepared remarks, there was a mention about shift of clients to INR 1 million bucket. Could you elaborate as to what led to this, what was the kind of services that we sold or cross sold? Anything, any com -- any color on that would be interesting.
[ Abhishek ], specifics, I won't have offhand, but in general, in the clients that move up the bucket, they are generally in the form of selling new concentric services, in addition to what we have been serving them already. So typically in a digital retail client, you may end up selling analytics or A/B testing kind of service, in addition to the current selected campaign management service. In financial services, it could be additional work in the areas of reference data or any regulatory risk reporting kind of process, so it's typically something related to what we are doing in the higher growth areas, in both cases, analytics and digital for example, and maybe KYC or reference data kind of services in the financial markets.
And lastly from my side, the staff utilization in the ten quarter period, I think you only had one or two quarters above 75. Do you think -- based on your commentary, do you think this can go back to those levels, or you think it's still more time to go there? Thanks.
So one of the reasons why it has remained at a lower level than what historically it has been is that the older legacy work which was slightly not efficient for us from pyramid perspective has rolled off of late. And the new services required, especially in the initial days, required more staff to ramp up. And secondly, due to the higher attrition levels that we have seen in the last couple of quarters, compared to our history, the bench is at slightly elevated levels, so I think once these two factors go down, we will see some minor improvement. But structurally, I don't see a massive improvement in this, because we are delivering newer services, which have that kind of bench requirement.
[Operator Instructions] The next question is a follow-up from the line of Vishal Desai from Axis Capital.
Just wanted to check in terms of Q3, do we face any kind of seasonality, are we expecting any momentum slowdown from the 1.6% or growth that we've seen in this quarter. Is there any seasonality impact that we need to factor in, going into Q3 and Q4, or we could expect momentum to accelerate or probably remain steady from here on?
Yes, I think in our business there is no defined seasonality. So I don't think that there is a constant factor which would either push revenues up and down in the last calendar quarter. So I think you should -- base case would be similar sort of performance, maybe a little bit up or down, depending on how events play out.
The next question is from the line of Ruchi Burde from Bank of Baroda Capital Markets.
For our on-site delivery center that we are ramping up, could you talk us through the resource composition in terms of locals and [indiscernible] dependency. Also, it would be great to share your view regarding -- are you experiencing any challenges or tightening of administrative norms around visa?
On your first question. I select ability, we not only hire locals, which means U.S. citizens, but we also tend to hire from local communities. That has been part of our strategy since day 1. Barring handful of single digit senior management that have come from other cities within U.S., everybody is from the local area. On your visa question, we don't have -- we didn't have any much footprint or strategy of sending people from India to do work in U.S. for clients. I think we are continuing with that approach and that is, in the current environment is when getting visas are tight. So we are largely not affected.
Secondly, Rohitash, could you explain the one-time gain that you had mentioned in the press release of on -- due to the Pune facility consolidation. What led to that?
It accounted to our existing landlords, signing up agreements for the newer lease. So since that event has happened, we had, it was certain lease equalization charge from the balance sheet, which flew through P&L, giving us advantage. Because now the total tenure of the bill is, sorry, lease is lesser than what we initially planned, right? So that has led to the impact of about INR 5 crores, INR 6 crores. To offset that, there were certain charges -- OpEx charges like stamp duty or other things, which go along with that. So that net benefit was only INR 3 crores to INR 4 crores.
[Operator Instructions] The next question is from the line of Apurva Prasad from HDFC securities.
On the emerging account side, how do you see -- I mean, what's the visibility of the --
Excuse me, this is the operator, so may we request you to please speak closer to the phone?
Yes, so on the emerging accounts, what's the near term growth visibility that you see? That's one, and the second was on margins. Any outlook in terms of medium term, how do you see that?
On emerging accounts, one of the comments that I already mentioned, that landscape, especially for the clients which are outside or lower than INR 0.5 million trajectory, that landscape remains volatile, because some of those clients or logos come for a project and then go away. Having said that, last 12 months, have been very good for us in terms of winning newer logos from Fortune 500 client league. So we will see how emerging landscape plays. Having said that, the clients in emerging space which are already established, typically INR 0.5 million bucket clients, we see, as PD mentioned, much stronger growth than what is currently being shown in that chart, right? Lower double-digits. We expect that trajectory should be much higher, in that. I'm sorry, what was your second question?
No, before that. The lower double-digits, this is -- what number you just referred to?
Yes, so about our emerging client growth, Y-o-Y basis, this quarter has been about 12% on constant currency. We expect that number to be higher in near term or medium term.
Okay, got that. And my other question's on margins? Your near term outlook on that?
As I think I alluded earlier, the margin trajectory, one is predicated on currency, which is pretty well known and disclosed in the deck, what is not known or clear at this point is the offshore revenue growth, which is the other big driver. All we can hinge on is the history of last four quarters, where the offshore revenue has not grown. So unless that picks up substantially over the next few quarters, major improvements, major organic revenue driven improvements in margin will be slower.
[Operator Instructions]