Firstsource Solutions Ltd

NSE:FSL

Earnings Call Transcript

[Operator]

Ladies and gentlemen, good day, and welcome to the Firstsource Solutions Limited Q4 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

On this call, we have Mr. Ritesh Idnani, the MD and CEO; Mr. Dinesh Jain, the CFO; and Mr. Pankaj Kapoor, the Head of Strategy, Investor Relations and ESG, to provide an overview on the company's performance, followed by the question-and-answer session.

Please note that some of the matters that we'll discuss on this call include the company's business outlook are forward-looking and as such, are subject to known and unknown risks. These uncertainties and risks are included, but not limited to what the company has mentioned in its prospectus filed with SEBI and consequent annual reports that are available on its website.

I now hand the conference over to Mr. Ritesh Idnani. Thank you, and over to you, sir.

[Ritesh Idnani, executive]

Thank you, and good morning, good afternoon, good evening, depending on where you're joining us from. Hello, everybody, and thank you for joining us today to discuss our financial results for the fourth quarter and full year FY '25.

I'm pleased to share that this has been a milestone quarter for us. We achieved an annualized revenue run rate of USD 1 billion, delivering this 4 quarters ahead of our aspirational goal of Q4 FY '26. Also, the incremental revenue we added in FY '25 was more than double the cumulative addition of the previous 3 years. We are humbled by these achievements, and I would like to sincerely thank each one of our 34,651 Firstsourcers around the world whose passion and commitment to consistently deliver value to clients helped us reach these milestones.

Coming specifically to our Q4 results, our revenue grew by 29.4% year-on-year and came in at INR 21.6 billion. In U.S. dollar terms, the growth was 24.3% year-on-year and 0.4% quarter-on-quarter at USD 250 million. In constant currency, revenue grew 2.1% quarter-on-quarter to close a tad above $250 million. EBIT margin for the quarter was 11.2%. This is higher by 10 basis points and 20 basis points on a quarter-on-quarter and year-on-year basis, respectively. Our net profit was INR 1.6 billion, and the diluted EPS was INR 2.28 for the quarter.

For the full year, our revenues grew by 25.9% in rupee terms and 23.3% in dollar terms. Our constant currency revenue growth was 22.6%, above the higher end of our guided band of 21.8% to 22.3% that we had provided in Q3 FY '25. Our EBIT margin for FY '25, excluding one-offs, was 11.1%, within our guided range of 11% to 11.5%. Our PAT for FY '25 stood at INR 5.94 billion, a growth of 15.5% over last year.

With that, let me turn to the deal wins. In Q4, we signed 5 large deals. As you are aware, we consider a deal with ACV of over $5 million as a large deal. Overall, we won 14 large deals in FY '25, including 4 deals that are over USD 10 million of ACV. This is the highest we have had in the history of the company. Our total ACV intake in FY '25 was also the highest ever. I believe the strength of our deal wins, both in numbers and scale reflects our success in leveraging our deep industry and functional expertise, our partnerships in the technology ecosystem and our ability to proactively bring automation and AI into the mix that's resonating well with clients and prospects.

Let me give you an example of the same. We won our largest deal in health care this quarter from one of the mid-market health plans in North America. This happens to be a new logo for us as well. This is a 5-year Business Process as a Service or BPaaS deal for us with an ACV well over $50 million in steady state. I would like to emphasize that several of our large deal wins, including the BPaaS deal I just referenced, are transformative in nature and have a staggered ramp-up curve that's different from standard deals. Hence, while they add to our longer-range growth visibility, their conversion into reported revenue happens over an extended period of time. You may want to factor this in your annual revenue growth expectations.

Let me now highlight a few other notable wins during Q4. We won a large deal from a global leader in financial technology solutions in the U.S. for both CX and back-office services. We also won additional business from a trusted provider of employee benefits and pensions administration in the U.K. with a large deal for transforming their contact center operations. We were selected by one of the top 10 health care payers in North America, an existing client for ensuring the accuracy and compliance of claims processing. I have spoken earlier about our plan to leverage the nearshore footprint that came to us through the Ascensos acquisition with some of our large existing clients.

In Q4, we expanded our relationship with one of the leading media and entertainment companies in the U.K. and among our top 5 clients with a large customer support deal that would be delivered from South Africa. During the quarter, we also added 7 new logos, including 2 strategic logos. As you're aware, we define a strategic logo as one where we see the potential of at least a $5 million annual relationship. In FY '25, we added 43 new logos, which include 12 logos that we consider as strategic.

With that, let me turn to the vertical commentary. Starting with Banking and Financial Services. In Q4 of FY '25, our BFS vertical was up 5% quarter-on-quarter and 12% year-on-year in constant currency terms. We added 1 new logo in this vertical in Q4. The growth was driven by ramp-up in the recent deal wins and the seasonal strength in our collections business. As you're aware, we've been focusing our efforts in this vertical on broad-basing our presence in existing clients and expanding our footprint into adjacent segments. To support this, we've strengthened our sales and solutions teams and are now bringing a wider set of capabilities to the table. We are starting to see impact of all of these efforts in the marketplace. The new logo we added in Q4 came through a large deal, and our exit pipeline for the quarter is about 20% higher than where we were a year back. This gives us confidence in sustaining a healthy growth in this vertical in FY '26.

In health care, we saw modest sequential growth in Q4, largely due to the lingering effect of the deal decision-making pause we mentioned in Q2. The good news is that the momentum is clearly picking back up. We added 4 new logos in this vertical and closed the quarter with multiple large deal wins, including a couple that I highlighted earlier in the commentary. In fact, Q4 was a record for us in terms of ACV won in this vertical. What's working well here is our ability to proactively stitch together creative nonlinear deal structures, the kind that really resonate with customers, especially given the tough environments that they are operating in. The BPaaS deal I mentioned earlier is just one illustration of the same. As you will note, even with some softness in the second half, this vertical grew 28% year-on-year in FY '25. We expect that momentum to carry forward into FY '26 as well.

Our CMT vertical delivered 6% growth quarter-on-quarter and 12% year-on-year in constant currency. We added 2 new logos in Q4. This has been one of our fastest-growing segments, thanks to strong traction amongst leading consumer tech brands, both within our traditional offerings as well as some of our newer nontraditional solutions. We continue to see a well-balanced pipeline here, spanning traditional media and communications players as well as digital-first and new age tech companies.

Lastly, coming to our diverse portfolio, which comprises of our retail and utilities business, we saw a 9% Q-on-Q decline in constant currency terms, primarily due to seasonal softness in the retail business. We see a healthy deal pipeline in this portfolio in both the retail and utilities verticals, which should translate to a broad-based growth in the coming quarters.

Let me now provide you some color from a geography standpoint. From a geography perspective, North America grew at 3% quarter-on-quarter and 30% year-on-year in constant currency terms. We expect growth to remain healthy and broad-based across our 3 core verticals in North America. Europe was down 3% quarter-on-quarter, mainly due to the seasonal softness in our U.K.-centric retail business. Clients in the U.K. are navigating a fair bit of macro uncertainty currently, and that's pushing them to move faster towards offshore and/or nearshore models. We've secured significant incremental business from 2 of our large U.K. clients to be executed out of South Africa over the last 2 quarters. We're seeing similar interest from others as well, although these conversations typically take time to convert. Our pitch for transformational programs is also resonating well with clients and prospects.

I spoke earlier of a large transformational deal win in Q4 from a U.K.-based pensions administrator. Australia continues to perform well for us with strong growth on the back of recent deal wins. During the quarter, we also opened our onshore delivery center in Melbourne and launched a dedicated AI innovation lab. The lab will collaborate with universities on AI, engineering, robotics and digital initiatives. Overall, we are optimistic about our trajectory in this region.

On the people front, we ended FY '25 with a total head count of 34,651 Firstsourcers after adding 507 net hires in Q4. For the full year, we brought in 6,711 new hires compared to 4,922 in FY '24, which is reflective of the strength of our deal pipeline as well as delivery ramp-up. Offshore and nearshore hires made up 80% of our gross additions, which aligns with the demand shifts we have been talking about. Attrition continues to improve. Our trailing 12-month attrition rate dropped to 29.8% in Q4, down from 31.4% last quarter, and we expect this trend to continue.

We are also investing heavily in upskilling. We delivered over 200,000 digital learning hours during the year, covering areas like Gen AI, automation and domain-specific skills. Internal talent mobility is another area we have prioritized and over 2,500 internal moves were made under our Internal Seeding initiative in FY '25. Finally, I'm proud to share that Firstsource was recognized among India's top 50 best workplaces for building a culture of innovation by all by Great Place to Work. It's a great validation of our people-first approach.

Let me now turn to the awards, recognitions and update on the sustainability front. I'm happy to share that Firstsource continues to be positively recognized by leading analysts for bringing significant value to clients and offering innovative technology solutions in our focus markets. During Q4, Everest Group recognized us amongst the frontrunners for Gen AI in the health care sector. ISG once again recognized us amongst The Booming 15 based on the annual value of commercial contracts awarded in the past 12 months.

I'm proud to also report that Firstsource was included in the prestigious S&P Global Sustainability Yearbook for the second consecutive year, this time with an even greater impact, earning recognition as an Industry Mover and achieving a Top 5% S&P Global CSA score amongst the 7,690 companies assessed during 2024-2025. We were also awarded the silver medal in the 2025 EcoVadis assessment. With an overall score of 71 on 100, we ranked in the 91st percentile globally, placing us amongst the top 15% of companies worldwide for excellence in sustainability. These recognitions underscore a collective effort of every member within our organization, and we remain steadfast in our commitment to operate responsibly and sustainably.

With that, let me turn over the call to Dinesh to give a detailed color on the quarterly and annual financials. I will come back to talk about our progress on the strategic priorities as well as the outlook for FY '26. Dinesh?

[Dinesh Jain, executive]

Thank you, Ritesh, and hello, everyone. Let me start by taking you through our quarterly financials. Revenue for the Q4 FY '25 came in at INR 21.6 billion or USD 250 million. This implies a year-on-year growth of 29.4% in rupee terms and 24.3% in dollar terms. In constant currency, this translates to a year-on-year growth of 25%. We reported operating profit of INR 2.4 billion in Q4 FY '25, up 32.4% over Q4 FY '24 and translates to EBIT margin of 11.2%, up 10 bps sequentially and 20 bps on a year-on-year basis. Profit after tax came in at INR 1.6 billion or 7.4% of the revenue for the quarter. Our profit after tax grew 22.6% year-on-year and 6.1% on quarter-on-quarter, adjusted for the nonrecurring items reported in the earlier quarter.

I will now turn to our annual performance. For fiscal year FY '25, our revenue stood at INR 79.8 billion or USD 944 million. This implies a year-on-year growth of 25.9% in the rupee terms and 22.6% in constant currency terms. That was a little over our guided band of 21.8% to 22.3%. Our operating profit was INR 8.8 billion, up 26.5% over FY '24 and translate to EBIT margin of 11%. Adjusted for onetime charge in Q2 FY '25, our EBIT margin for FY '25 was 11.1%, which is within the guided -- which is the guidance of the 11% to 11.5%. Profit after tax for FY '25 stood at INR 5.9 billion. This translates to a year-on-year growth of 21.7% adjusting for nonrecurring items.

Coming to the other financial highlights for the quarter and the year. Tax rate was 20.3% for the Q4 and for FY '25, the effective tax rate was 19.7%, which is within the guided range of 18% to 20%. We expect it to be in 19% to 21% range for the FY '26. DSO stood at 70 days in Q4. This was some delay in collection in a couple of accounts. All of these were subsequently collected in the first 2 weeks of April. Normalized to that, our DSO would be 67 days. Our cash balance, including investments, stood at INR 2.2 billion at the end of Q4. This is after the dividend payout of INR 2.8 billion during the quarter. Our net debt stands at INR 13.2 billion as of 31st March 2025 versus the INR 10.2 billion as of 31st December 2024 and INR 6 billion as of 31st March 2024.

We have added new seating capacities in Hyderabad, Bangalore, Philippines and Australia in Q4. Our CapEx in FY '25 was more than double that of FY '24 as we prepared for execution infrastructure for fulfill the order wins. To give a perspective, we added over 7,000 seats in FY '25 versus the 2,000 plus we added in FY '24. We will continue to invest in creating additional capacity in FY '26 as well given the strength of executable order book and the pipeline.

ROCE for FY '25 is 15.6% versus 15.4% for FY '24. Our hedge book as of 31st March 2025 was as follows: We have coverage of GBP 74.6 million for the next 12 months with an average rate of INR 110.3 per pound and coverage of USD 167 million with an average rate of INR 86.1 per dollar.

This is all from my side. I'll hand the call back to Ritesh to talk about our strategic priorities and outlook. Ritesh?

[Ritesh Idnani, executive]

Thanks, Dinesh. As you know, the One Firstsource framework has been our North Star for the strategy refresh in the organization over the last 6 quarters. I'm pleased with the progress we are making on each of the 7 themes we have defined as parts of this playbook and our success so far in translating this progress into business outcomes is evident in the consistent improvement in key client and deal metrics. In the last 4 quarters, we added 13 clients with over $1 million in revenue, 5 with over $5 million and 2 with over $10 million. The share of revenues from our top 5 clients has come down to 29.4% versus 36.4% and top 10 clients to 43.7% to 52.6% in Q4 of last year. Our strategy to position ourselves in new accounts as a challenger to the existing ecosystem by bringing in a differentiated technology-first solution is working well.

I would like to highlight that of the 14 large deals we won in FY '25, 5 of them were from new logos. This includes the BPaaS deal I spoke of earlier. These are visible signs of the success of our initiatives to broad base our revenues and build multiple growth engines. Our deal engine continues to do well. We ended FY '25 with 5 large deal wins in Q4 after clocking 3 large deal wins in each of the previous 3 quarters. The combined ACV of deal wins in FY '25 was up over 60% versus last year, and our exit deal pipeline is higher by over 30% versus Q4 FY '24. Our improved growth momentum has helped us gain almost 0.5% of market share over the last 4 quarters against the basket of 15 of our closest global publicly traded peers based on trailing 4 quarters reported revenues. This is a testament to the focus we have put in place over the last 6 quarters to use our strong foundation to take advantage of the market opportunities being created by the ongoing macro and technology shifts.

AI and other emerging technologies have potential to fundamentally reshape the BPO industry and the macro uncertainties are only accelerating the pace at which enterprises globally are adapting to this change and demanding a similar response from their partners. We believe AI can potentially turn the traditional business model of the BPO industry on its head because it shifts the axis from labor arbitrage to technology arbitrage. The traditional labor-linked strengths like large-scale global delivery centers, optimized employee pyramids and shared service factories could become weaknesses. And just a token use of AI and automation for incremental productivity gains will not help. In our view, companies who will be able to pivot their entire business model to the new axis will be the net gainers from this shift. Thus, size will be a critical success factor as past experiences show both very large and subscale companies find it difficult to adapt to such transformative changes in the industry model.

At a $1 billion revenue run rate, we believe we are at the right scale to be the disruptor. We are large enough to drive significant impact for our clients, yet agile enough to innovate rapidly. Unlike our larger peers, we are not restrained by excessive bureaucracy or legacy operations, allowing us to proactively capitalize on AI-driven advancements and emerging industry shifts. To this end, we announced last month our UnBPO playbook. That is our blueprint of how the new order would look and how we are preparing ourselves to succeed in rewriting the rules of an industry that has been in existence for over 30 years. For example, today, we are proactively creating responses to RFPs with solutions that have AI and automation at the core, and we partner with tech platforms to bring the latest platforms to complement our domain and process knowledge. The BPaaS deal I spoke of earlier or the work that we are doing with a leading EdTech company are just 2 examples of this.

In my previous conversations with you all, I have highlighted how we have transformed our training program to make it aligned to an individual's learnability instead of a one-size-fits-all structure. Overall, the UnBPO playbook reimagines the BPO business model from every angle with the AI lens through its 10 tenets. I would encourage you to explore this more at the UnBPO micro site on firstsource.com. In the 2 months since its launch, we have seen a strong interest from clients and prospects, many of whom have asked for follow-up workshops with their senior leadership teams to explore the tenets and assess their preparedness for the UnBPO model. The radical thought process behind UnBPO has also improved our visibility with industry analysts, several of whom have published extensively on the concept and are amplifying it with our target audience.

Overall, I am pleased with the progress we have made over FY '25 in each of the areas we have identified for a strategy refresh. What I find more encouraging is the growing recognition of our efforts that I see in our deal wins and pipeline. And with the UnBPO playbook, we are getting mindshare right at the CXO level amongst our client and prospect base. All of these are critical ingredients to build a resilient and durable business with industry-leading growth.

Finally, to the FY '26 business outlook. We expect our revenue to grow in the range of 12% to 15% in constant currency terms and our EBIT margin to be 11.25% to 12% band in FY '26.

This concludes our opening remarks, and we can now open the floor for questions. Operator, over to you.

[Operator]

[Operator Instructions]. The first question comes from the line of Vibhor Singhal from Nuvama Equities.

[Vibhor Singhal, analyst]

Congrats to the Firstsource team for a very solid quarter yet again. Ritesh, my question was on a couple of remarks that you mentioned in your opening prepared remarks. You mentioned that our size at $1 billion is probably the perfect size. We are large enough to drive changes in our clients' portfolio and yet small to be agile enough. Does this also -- does this revenue size also work in our favor in an environment like this in which there is an overall macro overhang and more of vendor consolidation. Do you think at this point of time, relatively smaller players like us tend to lose out? Or do you think with our capabilities, we are able to mitigate that as well?

My second question is basically on the overall demand environment. We're almost 1 month into the Q1, probably one of the most uncertain quarters that this industry has seen because of the tariff situation. Any color on what the client conversations are looking like? Are they becoming more -- is there more of a decision and delayed decision-making? And whatever color you could provide on that would be really helpful.

[Ritesh Idnani, executive]

Fantastic. Thanks, Vibhor, for your questions. Let me start by addressing the first comment that you made, which is around size. Look, one of the things that we've been consistently saying is that we're not that small that we don't get a seat at the table, and we're not that large that the bands of bureaucracy come back to bite us. And I think that maxim has held true in the way we have operated and executed in the current environment. Again, one of the things we have consistently said is the current environment has scope for divergent growth. We're not immune to macro headwinds. But I think one of the things that we are doing is we are engaging with our clients, highlighting our strengths, keeping our focus on execution. And I think that's what's helping us to continue to win in the marketplace.

In fact, we've been winning consistently against larger players as well as undifferentiated players of which this industry has a longer tail and gaining market share. For example, the large deal we won in a new logo in Australia was against several large players. What we are doing, and this is what honestly is helping us, is bringing our capabilities to the forefront, building on the deep domain experience that we had, the inch-wide multi strategy, proactively going to our existing accounts and expanding footprint. Our new logo hunting is also a lot more structured now. And all of this -- it's a combination of all of these factors that I think is allowing us to hold our own, and we think that opportunity continues to exist in the current environment as well.

Your second question was related to the macro. Let me just state one thing, which is I think we've been seeing the macro duality for some time now. I think it's just the degree that has gone up particularly over the last 4, 6 weeks or so. A few things to bear in mind. One is that the BPM services are not as linked to discretionary spend as the traditional IT services. And that would also, therefore, have an impact on what we see and say about the environment versus what our IT services peers might end up saying. And while clients have been cautious, I also think that we are finding that they are moving actively on programs where they see scope for meaningful cost optimization, not just by leveraging offshoring, but also by reimagining the process itself and bringing elements of technology arbitrage to the forefront. We have sized that opportunity and continue to engage with both our existing clients as well as new logos with solutions that create value for them. At our scale, we believe that the outcome of such conversations will have a higher impact on our growth than the macros itself.

[Vibhor Singhal, analyst]

Got it. Got it. That was really helpful. Just one last tidbit. After that I'll probably get back in the queue. The weakness that we saw in the retail segment, was that very much client and seasonality specific as you called it out? Or was there also some overhang of the tariff related uncertainty that we have seen with other companies in the retail sector?

[Ritesh Idnani, executive]

No, I think from -- at least from our vantage point and for the cohort of clients that we service, this was just a regular seasonality that you see in the retail business itself.

[Operator]

The next question comes from the line of Girish Pai from BOB Capital Markets.

[Girish Pai, analyst]

So FY '26 guidance of 12% to 15%, how much of this is inorganic? And if you can just look back on FY '25, can you just split that into the organic and the inorganic piece?

[Ritesh Idnani, executive]

So I think if you look at the guidance itself, I'm not going to comment on the math, but let me give you a flavor of what is sitting in the guidance itself, and I think we'll get into the specifics out there. We have give or take, from our vantage point, the 12% to 15% is the range at which we have provided. That guidance today is based on what we see as our line of sight for the business over FY '26 as we see it today. And it does not build any changes in the macro environment itself. And what also it includes is it includes some of the deal wins that we've had, but we've also been saying that several of our large deal wins, including the BPaaS deal I spoke about are transformative in nature and have a staggered ramp-up curve that's different from standard deals. So those are some of the variables that have gone into the guidance itself. And what I will say is we are not making any assumptions on the macro variables on which we have no influence. But those are some of the things that have gone into the actual numbers itself.

[Girish Pai, analyst]

No, I wasn't -- okay. I was asking about the inorganic elements to both the FY '26 guidance as well as FY '25 performance. How much was that?

[Ritesh Idnani, executive]

Pankaj, do you have a specific number that is there?

[Pankaj Kapoor, executive]

We have a 3%, which have been factored in the FY '26 guidance. And for FY '25, we have a 7%, which was a part of the inorganic.

[Girish Pai, analyst]

Okay. Ritesh, how did Q4 of FY '25 pan out? I mean, when the quarter started, were you expecting a certain number from a revenue perspective? Did the final actual numbers meet your expectations? Or were they higher or lower?

[Ritesh Idnani, executive]

I think we feel good about where we ended the quarter at. And let me just take a step back, right? I mean, if you look this in the context of a full year itself basis, our Q4 FY '25 at a $1 billion run rate business was 4 quarters ahead of guidance. So we obviously feel very, very good about the fact that we exceeded the guidance that we had provided to all of you all in terms of performance itself.

The way we looked at Q4, we knew going in that we have a wide portfolio of businesses with a presence across multiple verticals, multiple geographies, each of which has a different rhythm, right? Example, you might recall, we spoke in October last year about the pause in decision-making in the health care payer business ahead of the U.S. Presidential elections, and that had a lag effect on the revenues in this vertical in the last 2 quarters. But if you look at the deal wins and the deal momentum, they were fairly strong.

Similarly, if you look at in Europe, we saw a significant interest in shifting work, which again, we had talked about, which would cause some deflation in reported revenue growth. Likewise, retail, we knew that the Jan to March quarter after the November, December holiday period would be a seasonally a soft quarter in the retail market itself.

So I think we had baked in all of these elements when we had provided the guidance. And relative to what we had provided in the guidance at the end of Q3, I think we feel good about it because end of the day, we are trying to build a business which is resilient, which is on a consistent upward trajectory. So you will see our growth will continue to be at a band which is at the top end of the industry growth rate. And that's what we feel good about.

[Girish Pai, analyst]

Okay. And my last question is regarding visibility on this guidance you've given of 12% to 15%. The current ACV or TCV that you've clocked till 4Q, will that be good enough for you to deliver the lower end of the band? Or do you think you need to win more deals going into FY '26 for you to deliver that lower end of the band?

[Ritesh Idnani, executive]

So look, the guidance band, of course, is influenced by multiple things, right? For example, how we see the pipeline converting, the pace of ramp-up of deals that we have won, et cetera. While it will be difficult for me to quantify each and every variable for you, but what I would like to emphasize is that our guidance is based on what we are seeing today in our business. What we are not making any assumptions, as I stated earlier, is about the macro variables over which we have no influence. And I'm guessing that that's what you're trying to get a flavor of here. But we feel good about what we see at this stage. Let me just put it that way.

[Operator]

The next question comes from the line of Manik Taneja from Axis Capital.

[Manik Taneja, analyst]

Congratulations once again on a steady performance. I basically had a couple of questions. One was with regards to our segmental margins, if I look at the CMT vertical in particular. This is a vertical, if I understand correctly, you were going to see significant offshoring at your largest customer and some of which would basically translate to better margins. But if I look at the progression of margins in this vertical through the course of FY '25, we've only seen margins come up. So if you can talk about what's driving that?

And the second question is with regards to our growth outlook across industry segments. If you want to take a stab across which verticals will lead growth, if you could give us some sense in terms of which are the industry segments that you would expect to lead in terms of contribution in FY '26? Those are the 2 questions.

[Ritesh Idnani, executive]

Thanks, Manik, for your questions. On the CMT side, I would just state that some of what we saw there is cost of growth. We had a bunch of deals, new logo signings, et cetera, and some of the initial ramp-ups that need to happen to get the deals in steady state and so on and so forth is really what depressed the margin, if you will. But otherwise, we don't see anything out there that is a cause of concern. I think it will get back to where it needs to. That's the simple response that I would give on CMT.

On the growth outlook for FY '26 and the first comment I would make is that we are seeing this across the board, all industries, I think, will end up growing, and they will grow at a reasonably healthy pace. So it's not that we are seeing one grow more than any of them being laggard, if you will. That being said, we think the health care business will provide us meaningful growth. Some of our work in the utility space will grow, but it's on a smaller base. So the percentage growth will appear higher and that's what we end up seeing in terms of the business. But at the same time, financial services will continue to hold steady for us from a growth standpoint as will be our CMT business as well.

[Manik Taneja, analyst]

Sure. If I can chip in with one more question. If you could talk about the broad split of your CMT vertical across the traditional telecom and media customer base as well as new consumer tech logos that you basically made inroads into over the course of last 18, 24 months?

[Ritesh Idnani, executive]

Could you repeat that question again, Manik?

[Manik Taneja, analyst]

Sure. So my question was with regards to the broad construct of the CMT vertical. Historically, this was a business which was largely concentrated with traditional media and telecom customers. Over the course of last 18, 24 months, you've made headway with consumer tech customers. If you could give us some sense as to how the broad split up between these 2 category of customers would be right now?

[Ritesh Idnani, executive]

Got it. So we don't provide a breakup between the 3 subsegments itself, if you will, within the CMT vertical. But what I can tell you is that today, we are seeing growth in all the 3 segments. The tech segment is growing at a faster pace just by virtue of the fact that it's on a smaller pace of revenue relative to the telco and the media side of the house, but we have a very active pipeline deal conversion in the telco and the media side of the house as well, apart from growth in existing accounts. So I think all 3 segments will grow, tech will grow at a faster pace.

[Operator]

The next question comes from the line of Shradha from Asian Markets Securities.

[Shradha Agrawal, analyst]

Yes. Congrats, Ritesh, on a very strong execution once again in this quarter. A couple of questions. We've seen through all quarters of FY '25 that we followed a beat and raise kind of a strategy wherein we raised guidance all through all quarters of '25. While I understand that macros are volatile, but given the kind of exit pipeline that we are sitting at, so do you think there's some conservatism baked into our '26 guidance as well?

[Ritesh Idnani, executive]

So again, I just want to provide some element of the philosophy that was there, right? If you go back in time to FY '25, I think it was critical for us to provide and create a degree of predictability and certainty to the business itself, right? And that kind of played out in the way we started the beginning of the year when we guided to 10% to 13% and then it ended up being a beat and raise itself, if you will. And it was important to create that degree of trust in terms of being able to consistently deliver and eventually achieve industry-leading growth.

Obviously, when we provided the guidance in this environment today, what I will say is that we had a good set of deal wins, as you can -- as you heard from the commentary in Q4. We are exiting the year with a good pipeline. We are confident of converting some of that also in the current quarter trajectory for FY '26. But given the transformative nature of some of these deals that flow into the reported revenues will be over several quarters.

So at least what we are trying to do is when we look at the guidance band, we are trying to say it's influenced by a set of variables for how do we see the pipeline converting, the pace of ramp-up of deals that we have won. It's difficult for me to quantify each and every variable, but what we are trying to do is to ensure that our guidance is based on what we are seeing in our business today. We are not making any assumptions about macro variables over which we have no influence. And we remain focused on building a business model that's consistent and predictable growth trajectory. And that, in a nutshell, is what has gone into the 12% to 15% number itself.

[Shradha Agrawal, analyst]

Right, right. That's helpful, Ritesh. And secondly, on the deals that we've closed in this quarter and given that you've called out that there's a staggered ramp-up schedule of these deals. So just wanted to check, is there any upfront investment or employee takeover kind of a thing also in any of these deals? And how should we look at the margin profile of the large BPaaS deals especially and the other 4 deals also that we've closed, are they in line with the company average? Or how should we look at the initial margin flow of these deals?

[Ritesh Idnani, executive]

Yes. So as is the case with several of the large deals, you end up having some puts and takes that would be in there. There would be some upfront investments that would come into place, et cetera. But we do expect that these deals would -- they certainly would be in line with the company expectation from a margin standpoint.

[Shradha Agrawal, analyst]

Right. And in that context, when we talk of almost 100 bps improvement in our '26 margins and given the fact that we've already seen a 900 bps improvement in our offshore mix in '25 itself. So what are the levers in hand that we are trying to pull up to get to the guided margin band in '26?

[Ritesh Idnani, executive]

Yes. So Shradha, I think there's a lot of work that we're doing. And if you look back at just the last 3 quarters and the thesis that we were executing on FY '25, for us, the FY '25 storyline was industry-leading growth and range-bound margins because we knew we had to invest in the business itself. And obviously, we were doing cost takeout on the other hand to improve margins, which we could then reinvest back in the business, and that's how the margins ended up being relatively stable itself, if you will. If you look at the last 3 quarters, you see -- start seeing an upward trajectory coming in, in the margin story itself where we went from [ 11% to 11.1% to 11.2% ] over the last 3 quarters.

And we believe that there is an opportunity with all the different areas that we are working on to continue to expand the margins itself. Now where is that going to come from? Obviously, we expect some more rightshoring will yield value. We're working on stuff that we can do on the transformation side within our existing accounts itself in terms of what we can do from an automation, AI process excellence perspective. There's opportunity around the operational parameters itself, things we do around the quality workforce management side. There are some accounts which are low margin and what we can do to continue to shore up margins in those accounts is an opportunity.

How can we rationalize the talent cost? What can we do around pricing and change requests? How can we further bring down attrition and reduce shrinkage in the business? There are some policy changes that we have done, some facilities that we will let go off, which are spare capacity. So it's a combination. It's a pretty comprehensive plan. We've got roughly about [ 37 ] margin levers, which sit under these [ 9 ] broad buckets that I called out that essentially is the margin walk, if you will, that we are working on as a company to try and get to the -- to be in the 11.25% to 12% range.

[Shradha Agrawal, analyst]

That's good. And if I can squeeze in one last question for Dinesh Jain. So any thoughts on the debt position? How are we looking at reducing our debt over the next few quarters or years, if you may?

[Dinesh Jain, executive]

All cash flows to the debt repayment. That's the only thing I can say.

[Operator]

The next question comes from the line of Dipesh Mehta from Emkay Global Financial Services.

[Dipesh Mehta, analyst]

A couple of questions. First, I think I missed the FY '26 acquisition contribution, which you said. So if you can clarify what was the number? On the business side, I think if I look, let's say, cash generation, it remains fairly weak, 58% OCF to EBITDA conversion compared to our traditional closer to 65%, 75% kind of range. So if you can provide some sense how one should look OCF to EBITDA?

Second about health care. Provider business was soft for some time. Can you provide some sense about how provider business is doing for us considering the deal intake as well as pipeline?

Another question is about decision-making velocity. We have very strong deal intake this quarter, but things has worsened in the last few weeks. So whether we are seeing any implication because of it on decision-making velocity, which could have a ramification for quarter 1, quarter 2 deal closure. So if you can provide some sense around it.

[Ritesh Idnani, executive]

Thanks, Dipesh, for the questions. Dinesh, do you want to take the first 2 on the contribution from the acquisition to the guidance as well as on the EBITDA to the cash conversion piece, and then I can address the remaining 2 questions.

[Dinesh Jain, executive]

Yes. So contribution to the acquisition for FY '25 it was 7% and for the guidance which we've given for FY '26 is 3%. And EBITDA to cash conversion, I think the only -- which I said in my commentary, there are 2 clients where we have a slightly delay. So otherwise, if we normalize to that, still we are [ doing ] the OCF to EBITDA is 65%, which is what normally we did. And we are confident that I think going forward also, it will be around that level or slightly better.

[Ritesh Idnani, executive]

And to the remaining 2 questions, let me give you some flavor on the provider business itself in terms of what we are seeing out there and where the opportunity sets could be. So the first thing to bear in mind is that, look, if you take the health care overall market in the U.S., and it's just important to bear this in context, right, roughly about $4.8 trillion to $5 trillion of spend, growing at about 5.2%, 5.3% on a CAGR basis for the next 4 to 5 years. And some of that are secular themes, aging population, increased spend, et cetera, et cetera, which is contributing to that growth that is playing out.

If you take the addressable market for us in that, give or take, that's roughly about $200 billion from a TAM standpoint. Of that $200 billion, if you break it out, roughly about $120 billion is on the payer side, about $80 billion is on the provider side. If you further break that down into the degree of penetration that is there, roughly about 22% -- both the markets, the payer market is a little bit more penetrated at 22% to 24%. The provider market is hovering around 19% to 20% or thereabouts.

The secular theme playing out on the provider side is where a lot of physicians are becoming part of large hospital health systems. So there is an opportunity there with our full service capability to -- in the revenue cycle management side to capture and be a beneficiary in any consolidation efforts that continue to play out because there are very few players who cut across the front office to mid-office to back office of the revenue cycle management value chain itself. So that's an opportunity that is there.

Second is we see the play for us to -- we are again one of the few players who've got both capabilities on the physician side as well as on the hospital system side as well. A lot of players end up getting indexed to one versus the other. So that gives us opportunity. And third is we're using a tech-led approach out there for different steps in the value chain. And we think that, that again plays to our benefit. Take something like autonomous coding or what we are doing around areas like denials management, where we are using AI-based denial management before something even comes through in the system itself. So some of these are challenging the traditional labor-intensive methods that have been used. And we think all of that actually plays well for us in terms of growing the business itself. And that's the reason why when I think somebody else asked the question, how do you see growth playing out for FY '26? I said we expect all our verticals to grow, but we expect health care to lead the way in some sense.

Your next question was related to decision-making. So the commentary I would make is that, one, the discretionary side of the house is probably the area where, obviously, you start seeing almost an immediate impact, but then a substantial part of our business is annuity recurring business of which we have a greater visibility. And that's why you might end up hearing commentary, which is different than what our -- some of our traditional IT services peers might be saying. That said, look, we're not immune to any of the macro headwinds. We are watching it very, very closely as well. We are engaged very deeply with all our existing customers. And at this stage, we are trying to see how we can help them and use the current environment actually to our advantage to provide them proposals, which allow them to create operational efficiencies further in their business. At the same time, also use the opportunity to potentially take advantage of some of the technology shifts that are happening, particularly on the AI side and allow them to be a beneficiary of the same. So that's at least how we are playing the current environment in terms of interacting with our customers, be very vigilant, stay close to your customers and keep going back to them with ideas on what else they can do. And I think that certainly is helping us in the current environment.

[Dipesh Mehta, analyst]

I have one question, if I can squeeze on the BPaaS deal which you referred. You said about, let's say, it is transformational in nature, and that's why ramp-up is slightly different. Can you help us understand what are the variables, let's say, as a part of ramp-up and how one should look at it?

[Ritesh Idnani, executive]

Yes. So this is a very unique deal in a way where we'll be managing the core administration processes end-to-end in a BPaaS construct, where we are managing a consortium of partners, and this is in line again with the UnBPO tenet where we said we can't do it all ourselves, but we will bring -- we will be the orchestrator who is managing a symphony of partners to deliver an end outcome to customers itself. In this context, the customer has 4 lines of business, which will transition from their current technology landscape to the one that we are going to build over the next 24 months in a phased manner. The contract has a nonlinear construct in the form of a PMPM model a per member per month model. So you will see the revenue flow-through also happen accordingly in this fashion. So that's a little bit of color related to the transaction itself, and that's the reason why even in my initial commentary, the comment that at least we ended up making is that these deals have a staggered ramp-up curve that's different from standard deals, and it's something that you may want to factor when you're assuming the annual revenue growth expectations itself.

[Operator]

The next question comes from the line of Shalini Gupta from East India Securities.

[Shalini Gupta, analyst]

Sir, before I ask my questions, I would just want to...

[Operator]

I'm sorry to interrupt Shalini, could you please be a little louder?

[Shalini Gupta, analyst]

Okay. Sir, I just wanted to say that a little green behind the ears about Firstsource. But anyway, I have a few questions. One is that what is the view on staff cost? For example, when you hit a top line of $1 billion plus, then I mean, by how much do you expect staff costs will go up? Because I understand you may have a bench and you may want to utilize the bench a little more, things of that sort. So by how much do you expect the staff cost to go up broadly on a broad basis?

[Ritesh Idnani, executive]

Shalini, I'm assuming you didn't have any other question, right? So first and foremost, we should...

[Shalini Gupta, analyst]

I do actually. Sir, my second question is, what is the utilization rate? And the third question is, why is the revenue per employee falling? And these are my 3 questions.

[Ritesh Idnani, executive]

So first and foremost, Shalini, as you said, you may not be completely familiar with the Firstsource business. We'd love the opportunity to come and talk to you separately about it and give you a little bit more color on what we are doing. But let me give you some flavor. The BPO business, some of the questions that you asked, I know are very pertinent, especially in the context of the IT services side. But if you take the BPO business, it's a business where you hire to -- you don't keep a bench typically. You hire only when there is a definitive order on the table. So it's not a business where you're looking at keeping a certain percentage of people on the bench waiting for business to come through, so on and so forth.

The second is -- and therefore, that should address the staff cost and the utilization piece, but also the business model is shifting where we -- the traditional metrics that have been used in the industry around linking revenue to head count, i.e., every person you add in a linear manner creates revenue, those paradigms are shifting meaningfully. We already see a large part of our business being in a non-head count-based model, which is more outcome-based or some other form of a nonlinear construct, whether it's contingency-based, the gain share model, so on and so forth. And therefore, those metrics may not necessarily hold true.

The third question that you had, which was related to the revenue per employee falling, some of it, I have to look at the actual numbers. But if you look at the last 4 to 5 quarters, we have consciously increased the percentage of workforce that we have in offshore and nearshore locations, which come at a lower revenue realization than what you'd see typically in country in the U.S. or U.K. and/or Australia itself. So that's by design more than anything else.

[Shalini Gupta, analyst]

Yes, sir. And could you just say by how much do you expect your staff costs to go up in financial year '26?

[Ritesh Idnani, executive]

I think we'll come back to you offline on that. I'm not sure the context of that specific staff cost to go up. I mean, end of the day, we have provided guidance in terms of how much we expect revenue to go up by. We have also provided guidance on our EBIT line as well. So obviously, there is a bearing in terms of how different other components play out itself, right? But we'll catch up offline on this.

[Operator]

The next question comes from the line of Girish Pai from BOB Capital Markets.

[Girish Pai, analyst]

Yes. So we've had 4 good quarters from an order inflow perspective, 3 large orders in the first 3 quarters and 5 large orders in the fourth quarter. What's the outlook going forward? Because you said the pipeline was up quite a bit by the end of -- by the exit quarter of FY '25.

[Ritesh Idnani, executive]

So I think one of the things that you heard me say as well is that over the last 4 quarters, we've been making a very focused effort to rev up our sales engine. I've spoken at length about it as well, and that, I think, is what has allowed us to build a consistent flow of large deals every quarter. What we've been very conscious about also is to exit the quarter with a very healthy pipeline, and we remain focused on improving the odds of conversion itself. So I think just basis that, we feel pretty good about sustaining or, in fact, continuing to take advantage of the deal pipeline and hopefully continue to win a meaningful number every quarter as well.

So I think the other data point that I'd also mentioned in my initial commentary is that the combined ACV of deal wins in FY '25 was up over 60% versus last year and our exit deal pipeline is higher by over 30% versus Q4 of FY '24. So if I just look at those as metrics itself, those are good lead indicators of how we see FY '26 also playing out.

[Girish Pai, analyst]

Okay. My last question is regarding seasonality. Will there be a 1H versus 2H kind of situation, 1H being better than 2H or something like that?

[Ritesh Idnani, executive]

See, one of the things to bear in mind is in the past, if you look at it with -- our 2H used to be stronger and our 1H used to be traditionally, if you look at -- leave aside FY '25, but prior to that, I think what we've tried to do is that is to build a business that's resilient, that's on a consistent upward trajectory. So you will see that our growth continues to be in a band, which is at the top end of the industry growth rate. Obviously, some of the retail seasonality will play out in Q4 of every year just because of the nature of what it is. But I think one of the things that we have tried to do is to ensure that we account for the variations in quarterly performance that could happen depending on the trajectory in an individual vertical or a geography and still continue to be at the -- to have growth in a band which is at the top end of the industry growth. I think that in a nutshell is what we are striving towards. So rather than saying 1H or 2H will play out in a certain way, we want to make sure that we're just creating that sequential predictability itself in the business itself.

[Operator]

The next question comes from the line of Jalaj from Svan Investments.

[Jalaj Manocha, analyst]

First of all, congrats, Ritesh, on a good set of numbers in such a quarter for the environment. So my first question was with regards to the discussions you've had with the clients in the last 1 month or so, has there been a difference in the outlook or the way they're discussing for the new deals or the ramp-ups, specifically? And an added question to it would be, has there been a deceleration of pipelines or growth per se in the last -- sizable in the last 15, 20 days or the 1 month?

[Ritesh Idnani, executive]

So let me respond to the second question first. No, we have not seen a deceleration in the pipeline over the last 1 month. On the first question, we continue to remain very, very close with our customers, talking to them every day. I mentioned it a little earlier as well. Our objective is to try and see how we can continue to align with their strategic priorities. There is a degree of uncertainty. Several of them operate in businesses which may be subject to some of the macro headwinds more directly.

One of the things that I think is important to bear in mind is that the traditional BPM businesses does not have the same kind of discretionary pressures as what the IT services side has. And therefore, you might end up seeing some of the discretionary projects being the first off the block. At the same time, there's also a huge AI overhang because everybody knows that they've got to try and get on to the AI bandwagon and do and reimagine their entire business model itself and how they run their processes. So those conversations continue in full swing. And I don't think anything -- any of that is changing because I think a lot of clients know that they have to do that to continue to remain relevant. So from our vantage point, our objective is to continue to take those dialogues to them on a continuous basis itself. But we watch this very closely. That's where I will leave it at this stage.

[Jalaj Manocha, analyst]

Understood. Understood. And this is with regards to margin. And when I see that the offshore revenue has become -- there has been a sizable jump in the last 2 years in the offshore revenue for -- if I'm comparing year-on-year basically, still the margin -- it has not percolated to the margins. So I know partially it is because of the investments, but would you believe that this should start showing up in the coming quarter? Or what would take us -- what would it take to get the margins to move up from here?

[Ritesh Idnani, executive]

So I think I responded to this a little while back. I've talked about some of the levers that are value unlocks that are there from a margin standpoint. And if you look at the year gone by, I mean, the thesis was very clear. We wanted to deliver industry-leading growth while keeping range-bound margins because we knew it was important to invest in the business. So there was almost a conscious effort to do that. And if you look at -- as you rightly said, if you're taking more work offshore, it should be margin accretive. But the fact that we were investing in the business, there was a conscious effort to try and use the margins to try and build out some of the investments that we needed. There was an effort to take out costs so that we could create and expand the go-to-market team, which in turn is then contributing to the revenue growth that we are enjoying.

At the same time, if you look at the last 3 quarters, we're already starting to string together a story where there has been consistent margin expansion, 11% went to 11.1%, 11.1% went to 11.2% for Q4 of FY '25. And we think with the 37 margin drivers clubbed under 9-odd initiatives, we have a very clear plan on how we can achieve the 11.25% to 12% band that we have provided for as well. So look, several of the things will play out. I listed -- I'm not going to repeat the same 9 points again, but I'm sure it's there in the transcript as well.

[Jalaj Manocha, analyst]

Sure, sure. And one last question quickly. So -- and this has been discussed, just trying to put it in a different way. So the 12% to 15% growth, what bakes in on the -- or what would it take to reach to the upper end of the band and the lower end as in what assumptions have gone in, just wanted to understand. I understand that you mentioned that macro is not a key variable here. But what is the assumptions for both the ends of it? Just wanted to understand that.

[Ritesh Idnani, executive]

So look, I'm not going to comment on the specific math, but let me give you a flavor again of the guidance philosophy, right? It's based on our line of sight of the business over FY '26 as we see it today. It does not build any changes in the macro environment. And as far as the deal wins are concerned, one of the things that are there is several of our large deal wins in the recent quarters, including the BPaaS deal I referenced, they're transformative in nature. They have a staggered ramp-up curve. And while these deals give you better longer-term growth visibility, their conversion into reported revenue happens over an extended period. So that's one of the things to bear in mind.

We also had a good set of deal wins in Q4. We are exiting the year with a good pipeline. So we are confident of converting some of that also in the current quarter. Those large deal wins give us a good visibility on the growth trajectory for FY '26. And -- but given the transformative nature of those deals, that flow-through into the reported revenues will be over several quarters. That's one thing to bear in mind. But I think we feel good about some of the overall metrics that are there in the business itself with the ACV uptick that has happened, the deal pipeline being substantial, all of which should allow us to give us a good sense of visibility to the 12% to 15% number that we have provided.

[Operator]

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Ritesh Idnani for the closing comments.

[Ritesh Idnani, executive]

Thank you for joining the call and your questions. I just want to close with a few points. We are leading the industry in revenue growth. We closed FY '25 at a $1 billion exit revenue run rate, 4 quarters ahead of our earlier guidance. Our incremental revenue addition in FY '25 is more than double of what we added in the previous 3 years. Our sales engine is working well. We had 5 large deal wins in Q4, including the largest ever deal in health care in the history of the company. We totaled 14 large deals in FY '25, and our total ACV intake in FY '25 was the highest ever. We are adding large relationships and mining our existing relationships better.

There is a significant increase in the count of our $1 million, $5 million, $10 million revenue clients from a year back. Our top 5, top 10 client concentration is down by 7% and 9%, respectively, over the last 1 year, reflecting the broad-based growth in our portfolio. Our longer-term aspirations are intact. We believe that our FY '26 revenue growth guidance of 12% to 15% should keep us in the top decile of the industry. We remain laser-focused in improving our margins by 50 basis points to 75 basis points each year and bringing them in line with our peers over the next 3 to 4 years. That's all from our side, and we look forward to interacting with you again in the next quarter call. Thank you all.

[Operator]

Thank you, sir. Ladies and gentlemen, on behalf of Firstsource Solutions Limited, that concludes this conference. You may now disconnect your lines.