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Ladies and gentlemen, good day, and welcome to the Tech Mahindra Limited Q1 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. C.P. Gurnani, MD and CEO, Tech Mahindra. Thank you, and over to you, sir.
Good morning, good afternoon, good evening. Wherever you all are, thank you for joining this call. This Q1 '24 earnings call, I have with me my senior leadership, most of you, you all have interacted with, but I do have my other colleague, Mohit Joshi, who is taking over from me, and he is the MD and CEO Designate. I want to take this opportunity on behalf of all of you to welcome Mohit Joshi to Tech Mahindra. He has now spent about 5 weeks into the company. And as the old saying goes, baptism by fire, sure enough he is getting that exposure. At the same time, he will share his own experiences with you.
Tough times don't last. Unprecedented times don't last. Challenges of global economy, challenges of communication media sector, I think I can keep counting the various reasons why Tech Mahindra has faced one of its toughest quarters in recent times. My own personal belief is some of the transformative projects coming to an end, one-odd customer declaring bankruptcy, a few challenges on the road and overall, the revenue drop and our costs. I mean we have not been able to balance it right and which has become a prescription for a reasonably bad quarter in terms of our overall performance. And I can only see an upside. And upside has really 3 or 4 reasons why I think we have a decent upside.
Number one is our customer focus, customer relationships, our dialogue with the customers is still very, very strong. That effectively means is that we can plan a lot better, and we can also be at -- be a lot -- our customer centricity will help us recover from where we are. Number two is our investment in talent. Just to give you an example, we trained 8,000 people last quarter, upskill, in new AI platforms and in generative AI. Effectively, that means that we have utilized some of these challenges to repurpose and retrain our people. So focus on people, focus on talent and overall a very, very strong generative AI studio, developing a lot of solutions and use cases, I think, will help us as we go forward.
I mean, thirdly, I think we clearly are, again, investing or making sure that we continue with our investments not only in the new technologies, we have announced more investments in quant computing, more investments in cybersecurity and AI. But I think those overall -- our differentiators being 5G, connected solutions and network and experience management through [indiscernible], I think, will continue to be very strong differentiators, and we will convert them into solutions for the clients not only 30 use cases that I said about AI but also by increasing our reach with the clients.
Last but not the least, I mean, there are operating levers. We -- both Harsh and Rohit have worked on those operating levers, and we are getting into the mode of execute, execute, execute. So while we have got various accolades also from our technology partners, from different customers, but I think it is important to recognize that our results could have been better.
I can take you through the results, but I think the best way is to reinforce my confidence that this quarter is a blip in our growth trajectory. We have a robust pipeline of opportunities across all geographies, across all verticals, across all service lines. We pride ourselves on our customer centricity and people centricity. We are confident in our ability to overcome the current challenges, and we will emerge stronger as a leader in IT services industry.
We have a solid foundation of capabilities, assets, values that differentiate us from our competitors. The market demand is still strong, and we do believe that we are in a position for future growth. So I can only reinforce that treat this as a blip, and we are getting better focused on execution, more agile on meeting revenue and costs.
And over to you, Rohit, I mean, if you would like to take us through the numbers, I mean, somehow I don't have that. As I'm trying to avoid getting into the real numbers -- the numbers right now.
Sure. I will take it. Good evening, everyone. Good morning, good afternoon based on where you are. Let me cover the company financials for the quarter ending June 2023. We ended the first quarter with revenue of USD 1,601 million versus USD 1,668 million last quarter, which was a sequential decline of 4% Q-o-Q. The decline was more in our CME vertical, which declined by 9.4%, while the enterprise decline was marginal at 0.4% Q-o-Q.
Our TCV deal wins were lower than the previous quarter at $359 million. Revenue in INR terms was INR 13,159 crores versus INR 13,718 crore in Q4 showing a reduction of 4.1% Q-o-Q. The EBIT for the quarter was at $108 million, rupee terms INR 891 crores versus last quarter at USD 186 million, in rupee terms INR 1,530 crores in Q4.
The EBIT margin was at 6.8%, a drop of 440 basis points due to 3 areas of drop. One, revenue drop impacting margins quarter-on-quarter. We had to take some onetime provisions in the quarter mainly driven by certain customers declaring bankruptcy and on accounting principles, we had to reserve for that exposure. That's causing a onetime provision in the quarter, impacting margin by approximately 2%. And then the seasonality in Comviva where the top line decrease impacted margin by 0.5%. The 2% on onetime provision and reduction, 2% broadly on revenue drop impacting margins and 0.5% is probably [indiscernible] margin.
Look at the low EBIT, other income for the quarter was at USD 23 million versus $37 million in Q4. Forex gain was $5.4 million compared to a loss of $800,000 in Q4. The effective tax rate for the quarter was 27.6% and PAT for the quarter was $84 million, in rupee terms INR 693 crores. Net profit margin for the quarter was at 5.3%. Free cash flow for Q1 FY '24 was USD 106 million, 126% of PAT. DSO was up by 2 days at 98% compared to Q4 at 96. As mentioned earlier, we continue to consistently follow rule-based hedging policy. As of June 2023, the total hedge book was USD 2.7 billion versus $2.3 billion in Q4 '23. Based on hedge accounting treatment, net mark-to-market at the end of 30th June was USD 33 million of which $8 million was taken to the P&L and the rest $25 million were taken in reserves.
We had a cash, cash equivalent of $939 million, in rupee terms INR 7,701 crore as of 30th June.
In summary, I like to reiterate that we are committed towards executing the plan targeted actions, as C.P. mentioned, to improve our profitability as we head into the rest of the year.
I now open for any comments [indiscernible] questions, to open the floor.
Rohit, I'll just interrupt for 30 seconds. I just wanted again to welcome Mohit and Mohit if you would like to just say hello to your analyst friends.
Thank you, C.P. And it's great to speak to all of you again. Just to make a couple of quick points, really 3 points. The first is that as C.P. mentioned, it has now been 5 weeks since I joined TechM and I've really been gratified by the very warm welcome I've received from the teams, from the wide ecosystem, from many of you and from our clients. The second piece is that over the past 4 to 6 weeks, I've had the opportunity to visit with many of our clients, to visit with many of our centers to take stock of our service lines. And I'm very enthused by what I see, right? Really a very strong connect with the employees. We really have a very unique affinity to Tech Mahindra and to the broader Mahindra Group and its values.
Got to meet a set of customers who, again, in most cases, have had a multi-decade relationship with TechM and really see us as an integral part of their tech-driven transformation journeys. And then got the sense of our service lines, right? It's really -- I have seen a lot of investment, our cutting edge and across the board are being infused with AI as well. And the final point I wanted to make was, obviously, we've had a challenging quarter, but in the medium to long run, again, given what I've seen at the company, our clients, the ecosystem, I remain very optimistic about the opportunities in front of us. And look forward to working with all of you through many, many years to come. Thanks, C.P., and back to you, Rohit.
Rohit?
Thank you. We now open -- thanks, Mohit. We now open it up for questions. Please take it up as it comes.
[Operator Instructions] The first question is from the line of Sandeep Shah from Equirus Securities.
The first question is, looking at the decline in the revenue at close to 4%, is it fair to say that most of the headwinds on the demand, especially on the communications side is fairly behind where you may see a gradual recovery? Or you believe full quarter impact, which has not come in the first quarter may come in the second quarter? And Rohit, just a bookkeeping question. In terms of 200 bps provision for doubtful debt looks like the clients may have a revenue above $100 million, looks like a big client. And is it in the telecom account or in the enterprise? And congratulations Mohit Joshi and all the best.
Yes. So maybe I'll answer the second one first, Sandeep, and then we'll go to the first one. On the second one, it's a cumulative number from the discussion of the customer has been ongoing for the last 3, 4 quarters, right? And that's amount is a pile up of that. The annualized -- the quarterly revenue already in the Q1 baseline is impacted. So we've not taken that revenue, right? So quarter-over-quarter not going to have a decline or any impact to the year in terms of run rate, but it's a culmination of 3, 4 quarters of impact. So that's on the one timer.
And then in terms of communications, I would say you're right, most of the headwind is behind us as we look forward. But in general, the telcos are still pretty tight on their budgets on any capital outlays on projects as well as on OpEx. They focus a lot on OpEx reduction. So as we move forward, I will continue to work closely with them to ensure that we align our strategy in making sure we help them drive more outcomes as they look for the rest of the year and the next year forward. So I'll also request Manish who's on the call to give a little bit more flavor on -- as he looks forward for the rest of the year, how does he see it across regions and customers.
Sure, Rohit. I'll just add one additional point to what you just said. I do concur with Rohit that the worst is behind us, most of the headwinds we have seen. There is another factor that does happen in Q1. I hope all of you do recall is there is an element of cyclical nature to our -- 1 or 2 of our businesses. That also plays out in Q1. Our endeavor always is to try and compensate for that through additional growth, but then this was like a perfect storm where all budget -- budgetary pressure is on discretionary as well as the cost take out on current OpEx. All 3 factors were happening at the same time. So fundamentally and structurally, I think we are still very well placed to continue to scale growth from hereon.
Okay. Okay. And Rohit, how to look at margins going forward? And question to Mr. Mohit. As you have joined, it looks like both the departments on margin and revenue growth need a turnaround. So will you like to first focus on margins and then look for turnaround or you may look to handle both and repair both on a going forward basis?
Yes. So Sandeep, maybe I'll take it first in terms of our actions and then pass it on to Mohit for his views. But from an action perspective, when you look at where we are in terms of opportunity, I think there are 3, 4 areas that we had articulated before, which will continue to execute. We've seen some improvement in these metrics, but I think there's more to be desired. So if you look at subcon, our cost was 16% of revenue, which we now are closer towards 14%. And we said that we will continue to aspire and get towards less than 10% there, right?
So that continues to be a focus area as we move forward for the rest of the year. When we look at our juniorisation pyramid structure, we've articulated that, that's an area of improvement. As we go forward, we'll continue to invest in that and make sure we bring more juniors into the organization, driving more efficient average resource cost. That shall help us give more productivity as we move forward.
We'll continue to drive offshoring that we had mentioned that we have a room of 4% to 5% improvement in medium term and continue to execute on that. So these are the operating levers we feel comfortable available to us to execute as we move forward. And then the divestment for nonstrategic portfolio. While it has small impact on margin improvement, it does have significant impact on managerial bandwidth to focus on what matters most. So we'll continue to drive that also for the rest of the year. So these are some of the levers that we'll work on, and we've mentioned those in the past as well. I'll hand it over to Mohit to give his views.
Yes, just to add to what Rohit said, look, at the end of the day, it has only been 5 weeks for me in the organization, and I'm more in a mode to listen and to learn. And we have an extended transition over the next 5 to 6 months. And so we'll develop a plan in concert with the entire team to turn the trajectory around. Again, I'm sure a lot of those actions will be similar to the ones that Rohit has just outlined.
The next question is from the line of Vibhor Singhal from Nuvama Equities.
2 questions. One question I have for Manish regarding the telecom segment. You just described this quarter's thing kind of a perfect storm in which the entire spend on the discretionary part and everything was put on hold. So just wanted to dig a bit deeper on that. So how -- what should I say -- how deeply entrenched -- is that what you saw in this quarter? I mean, what you saw in this quarter, was it just -- I mean things that have been piling up for the, let's say, last 3 quarters and we just -- I mean, eventually they came into being in this quarter on the...
Your voice is not clear. Can you use the handset, please?
Okay, sure, sir. Is this better?
Slightly better.
Yes. Sure. So Manish again, sorry, just to reiterate on that question. So I just wanted to dig a bit deeper onto what exactly transpired in the telecom sector? And how do you see this going forward? I mean do you think that large part of the cuts that you saw in this quarter are kind of done and the hereafter, we kind of hit a bottom in this one? Are clients still reluctant to spend and there could be more cut in discretionary spends coming forward -- going forward in the coming quarters? And any other scope of, let's say, recovery in the telecom spend that you will see over the next few quarters?
Absolutely, Vibhor. So thank you for that question. Look, I don't think anything in this large industry happens in very short bursts. There is obviously patterns. There are things that we have been discussing over the last several quarters as well in terms of how the industry is shaping up. You've seen the results of many of our other esteemed competitors as well in terms of the pressure points they are facing. The way we look at it, and we are analyzing the situation is that there will be a lot of reprioritization that will continue to happen on digital transformation projects.
They are evaluating -- almost all the major operators are evaluating those on where they need to press the pedal versus where they need to take off the accelerator. And we are very well entrenched in all those conversations with most of our key customers to understand that. The other pressure point is, of course, on the OpEx because the cost of capital has changed dramatically, clearly, they need to generate more cash is more acute at this point in the industry, and that also is what is driving it. Now I can't predict how soon will things ease out on that. But where we have a good vantage point and the viewpoint is from our funnel and our pipeline and our discussions, both in terms of cost as well as opportunities.
And from that standpoint, which is why I called it a perfect storm last quarter that maybe we've hit the worst, and we now need to start gradually inching forward. I'm not necessarily saying that all and every pressure point is over and done with. Some of those we'll have to continue to deal with. It will be a gradual progress in terms of recovery for the industry and as a result for someone like us. But I think we will start making good progress from this quarter and definitely from the second half of the year.
Got it. Thanks for that very detailed explanation. My second question was on the enterprise business and especially on the manufacturing vertical. I think the manufacturing vertical has held up quite well for us over the past 7, 8 quarters. I think in the eye of the -- cut in discretionary spend, I just wanted to basically understand how is this segment looking because I think we've seen this for other players as well, the manufacturing vertical continues to be the one where everybody -- almost all IT vendors are kind of seeing continuous growth. So is this vertical where we could see maybe this growth pattern and the spending continue? Or how is -- what is our conversation with our clients leading us to believe?
Yes. So maybe I'll add a little bit of flavor to this and request Jagdish to add a few more points. But just if you look at manufacturing, overall, the industry is going through a transformation, right? So when you look at any segment within manufacturing, more and more digitization is happening, more and more embedded software are getting created in the machine. That is making the change in terms of the requirement from those companies in terms of services they request from us, right? The requirement is more becoming software-oriented. But engineers skills requirement that is being gathered getting more software oriented. So with that, there's a lot of transformation happening and we're seeing the demand shift more in that nature.
When you look at our focus on a manufacturing standpoint, we are heavily entrenched with automobile, aero, right? Both of them are growing very, very positively, right? From an industry dynamics perspective, lot of automobiles are switching their plans from the existing car -- to the mechanical cars for more EVs. Hence they need platform orientation, they need engineering support there, they need the system to be put together. So a lot of investments that are happening in that thing that is helping us favorably. And then the aero vertical is back to shape with travel coming back. Again, there our demand is being helped by that change, right?
So I think that's something we've also recognize and we continue to invest in this vertical. We've done a few -- we did some inorganic investments also around [indiscernible] and which is helping us and there's some competency that we got. So all of that together is helping us penetrate the clients better. We are helping them service with more and more service lines, not just IT, engineering support, be it commerce from an experience design standpoint or [DPS] which is a very strong and robust franchise for us. So it's helping us penetrate better with the same clients with the credibility we've been able to drive and that legacy is very strong from a penetration standpoint. So that's kind of the underlying reason why we feel good about it, and we see that the trend will continue favorably as we look for the rest of the year. Maybe Jagdish, you want to add something more?
Sure. Vibhor, thank you for the question. And Rohit, you have outlined it. So from our perspective. The growth obviously has 2 components to it from -- let's look at markets and let's look at the segments. If you look at the markets, primarily good part of the growth in manufacturing today is being driven by Americas and EU in terms of the opportunities that are coming. The areas Rohit has already outlined, primarily auto, which is our strong segment, partnered with industrial and aero and defense, but also is a function of the investments we've done. We've invested in building a solution, and our engineering services, as you know, is a critical player in driving the growth.
The IES capability and the digital capability that we've added. In both of these, the segments that we have invested in for electrification and in industry cloud with hyperscaler, a couple of them, I think is what gives us a little more bullish impact of where we think manufacturing growth will sustain. The pipeline also is quite robust. And I think we will start to see -- even though the conditions overall are tepid, we will see C2C growth in manufacturing.
So just to wrap it up on that. So we're not seeing too much impact of any cut in discretionary spend in the manufacturing space. Is that what we can conclude? Or do you think they are being more than mitigated by the kind of catch-up spend that the industry has to do?
Yes, I think in this case, the -- our work profile, it depends where the growth is coming from. So a lot of our work profile is today driven through running the business platform. But especially, as you know, on the auto sector, both on EV as well as on some of the platforms we have created, right, the warranties and some of the other solution platforms we've talked about are becoming critical for the demand to be fulfilled in the auto sector. And that's though in discretionary spend, there is not much cut there. So in the auto segment, at least we have that strength coming together.
[Operator Instructions] The next question is from the line of Gaurav from Morgan Stanley.
I have 2 of them. The first, how should one look at outlook for second half in respect to the deal wins that you had? Like the trailing 12-month deal wins is down by 25%. Keeping that in mind, how do you see your second half playing out? What are the areas that is giving you confidence? Second is on areas of business that are actually positively exposed to generative AI versus the ones that could be negatively impacted due to deflationary pressures? How are we preparing for this? And lastly, within top 11 to 20 accounts, it looks like a significant decline, anything going on there?
I think it's a good question. So let's look at it a few different ways of looking at it. Clearly, there is not only in introspection, but it is also time to act. As I said, the company has a definitive plan on looking at how to stop looking back but to look forward and look at all the 3 vectors that will help us improve our response to the market. Number one is being able to look at all the technology investments and also look at all the reskilling, upgrading our own people or creating -- using this opportunity to take a few tough calls. For example, our on-site offshore issues, our subcon hiring, juniorisation. So that is one which I say, which is an easier playbook, but important focus is execution.
The second part is on the growth vectors. I mean I think it is 2 parts to growth vectors. Number one is on the deal close, be a little more realistic about the closure deals because customers obviously are in different segments, reacting differently to the cost transformation or business transformation proposal. If we are more realistic with our closing dates, I think we will be able to prioritize a lot better. Number third, in terms of increasing our account penetration, account reach or to get better engaged with the top 200 accounts, I think we're doing a reasonably good job. It's just a question of how to recalibrate during the headwinds. So obviously, what I'm trying to say is, when you can't score runs by sixers or the bigger deals, then go for singles. So those are the strategic changes that we need to make. But overall, I am confident that this was a tough quarter, but it was also a tough wake-up call that we need to be a lot more quicker, agile and we need to readopt our strategy for each of our customer success offices and each of our large deal programs.
The next question is from the line of Sudheer Guntupalli from Kotak Mahindra AMC.
Rohit, is it possible to quantify the revenue impact of the client bankruptcy event in this quarter?
So broadly revenue impact in this year is [indiscernible]. But when you look at year-on-year quarterly is around a run rate of $6 million to $7 million.
Okay. So on a sequential basis, you had a hit of $6 million to $7 million because of this event?
Q4 versus Q1. Yes.
Okay. Okay. And is the wage hike impact taken in the quarter, partially or at least or that is still pending?
Majority of the wage inflation is already done in Q1. Only for certain senior proportion of the employee base it will happen in the following quarters.
Got it, Rohit. And last question, in a quarter like this, obviously, one would have expected the company to dial down on cost. But your sales and support headcount seem to have increased by almost 200 people. So is it sales-driven investments that you are upfronting or are there some element of support staff addition here?
That's part of our leadership program hiring that we do from campuses annually, it's more driven by that.
The next question is from the line of Ashwin Mehta from AMBIT Capital.
In terms of -- if you look at your headcount, there's a 10% reduction over the last 3 quarters but our employee costs seem to have gone higher. So is it that the cuts happened more towards the end of the quarter, this quarter? What is driving this?
Yes. So when you look at 2, 3 aspects, when you look at year-on-year or last year, our -- while the headcount is overall down, but when you look at increases the increments happened more towards Q2. Last year, in the baseline, you don't have that impact. And this year, the increase we have done it effective for majority of the population. We've done it effectively in April. We had a double impact there from a wage inflation perspective, right? That's causing the offset in a way to the correlation to the headcount reduction. And for the quarter Q-o-Q movement, while the reduction has happened in [IT] of approximately 2,000 people. Yes, from a timing perspective, it's more towards the second half as well. That will show as a full quarter impact as we go forward. Then I think also what we've done as part of that articulated that we'll continue to reduce subcon. And wherever we have the skills that we've been working on [indiscernible] we've replaced those subcon resources with whole-time headcount. That is also reflected [negative] since it is only on-site.
The next question is from the line of Rishi Jhunjhunwala from IIFL Institutional Equities.
Just wanted to get some more color on our expectation of margin recovery over the next 12, 15 months, especially if you look at from a headcount expense perspective, you are currently operating at 87% utilization, have seen a 10% headcount reduction in the last 3 quarters. And our offshore mix also is pretty much at an all-time high. On the flip side, we are also talking about subcontracting, which would mean that subcontractors have to be replaced by permanent employee. So effectively, if we have any sort of growth coming back over the next 12 months, then your headcount growth has to be faster than your revenue growth. So just trying to understand, I mean, some of the levers that you talked about in terms of recovery beyond, say, the current blip that you have, what exactly will drive that specifically?
Yes. So Rishi, few areas, then maybe I'll start with subcon that you mentioned. The 2, 3 areas within the subcon also while in some cases, you'll end up replacing subcon with full-time headcount. But when you compare cost-to-cost basis, there is a differential easily of around 25% there, right? So typically, you would say [indiscernible] reduction there will reach 1% overall impact rate from a margin standpoint. So that's one kind of direct-to-direct replacement in Q2. Second is, even within the subcon bucket, there's an opportunity from a vendor perspective that we continuously work on to see how do we rationalize and optimize the scale benefit at a company level.
So that -- those are multiple productivity initiatives that we will continue to drive for overall subcon side given that quantum is pretty large, right? When you look at from a company perspective, 14% from an annual basis, you're talking about $800 million plus spend. And when you look at leveraging the scale benefit, there's all productivity opportunities that they can drive there, right? So that's the second that we'll continue to work on.
And then some other perspective of margin improvement. While the utilization is high, we still feel, from an offshoring perspective, we have a better, still 3% to 4% or more headroom to get better on offshoring versus where we are today. That should give us significant benefits. And then juniorisation, when we look at the employee base today versus how much freshers we have in the system and how we can drive that go forward, there is an opportunity that in medium term, we can get better on. So those are some of the levers that we can continue to work on. And then as I mentioned before, one of the areas that we look at from a [large perspective] getting into more maturity stage and execution tightening there in line with the planned view, I think that will also help us improve profitability as we drive more productivity in those projects. So those are some of the levers that we will continue to drive as we move forward, including rationalization, [indiscernible] or divesting a certain business, which we don't feel is long-term strategic or giving the value we need.
The next question is from the line of Girish Pai from Nirmal Bang Equities.
The second half recovery is based on the existing TCV or are you expecting any significant TCV expansion to happen from 2Q onwards? That's question number one. Second, one of your larger peers talked about spend shifting away from 5G in the telco space. Is that what you're seeing on the ground? What does that mean for the investments that you made in the 5G space?
Manish, you want to answer first?
Yes, absolutely. No, I think I mentioned that there is a reprioritization happening in the industry from digital standpoint and the digital in telco parlance answers to everything from 5G to their customer experience platforms to the core BSS and others. And that is happening because we are clearly looking at where do they get a better bang for the buck from a short term in terms of -- if it's the U.S., then it is about a better conversion on the wireless consumer base. In parts of Europe, they are looking to shore up their enterprise businesses, which is -- and clearly, as now we all have seen the enterprise use cases and revenues from the 5G has really not -- is going to take longer than probably anticipated.
So that, I think, is in the queue. I guess we are observing the same pattern, but clearly, the reprioritization is underway. That said, I don't think our investments are in any kind of a jeopardy. All of them, both on the devices as well as on the network or for that matter on our software platform side, all continue to do very well. And I think they will continue to serve us well in time to come as we go forward. I don't think we have -- we are worried about that aspect as far as our portfolio is concerned.
The next question is from the line of Manik Taneja from Axis Capital.
Just wanted to understand the way our revenues in Europe and ROW essentially have declined sequentially as well as the decline in terms of active clients, if you could talk about what's driving that? And the second question was with regards to the comment that the management had made after Q4 results that FY '24 will be a very strong year for deal closures. Given what we have seen in Q1, how should we be thinking about this comment going forward?
So Manik, on deal closures first, I think we articulated that our first half would be tough given the macro environment and the situation. So we'd always maintain that, that first half will be tough and second half will be a recovery. It will be a mirror opposite view of the last year, where first half was okay and second half started getting tougher, right? So I think that's what we said and what it's turning out to be is that plus even a little bit worse than that view, and that's why you see the current.
So I think that's been consistent from that perspective. In terms of the other question you had on number of active clients, I think that's more driven by the reporting guidelines we follow on threshold of revenue in the quarter and the last 12 months, and this is that the bottom 40-odd clients sell off their threshold requirement, and that's purely a tail change from a quarter-over-quarter perspective, nothing more than that. And I think you have one more question, sorry, Manik.
The other question was with regards to the sequential drop that we have seen in Europe and ROW as compared to North America holding up quite well. If you could help us understand how the 2 sides of the business, the enterprise and the comps could have performed across each of these?
Yes. So ROW is partially driven by the Comviva seasonality. And certain closures in projects that happened in network services with one of our customers there will be working on a [lab] project with them. So that drove the ROW decline sequentially. And then from Europe perspective, again, the decline in communication vertical, driven more around the e-commerce, the Network Services where there were project closures versus Q4 that led to the decline there. In general, certain discretionary spend cut with the telcos that Manish mentioned. Overall more aggravated in Europe, this time than U.S. U.S. is already flat.
The next question is from the line of Mukul Garg from Motilal Oswal.
I have 2 questions, one for Rohit and one for Manish. Rohit, first of all, just a clarification, if you can help break out the impact on margins from wage hikes this quarter? And secondly, all the steps which you articulated about the impact, the steps to improve profitability, juniorisation, offshore and subcon reduction, won't that be deflationary on revenues going forward? How should we see the -- how are you going to replace the impact on growth from maybe billing impact? Manish, on the communications side, is it possible to give some color on the areas which were impacted? If you look at BPO business grew this quarter, so the impact was pretty much on the IT side. Was that Network Services or on the IT, which got hit. We have seen commentaries from a lot of telecom equipment guys being fairly negative on spend. So if you can just give us a color on what is driving this decline?
Yes. So maybe, Manish, why don't you give the communication answer first, and then I'll talk about the other one.
Yes, sure, sure. So Mukul, I think the -- look, we partially answered it bit earlier, both Rohit and I, but just to be more clear and specific. One is there is the cyclicality that happens to our Comviva business. Second, a pretty significant impact that happened from a project that closed in the network space in ROW. We -- and it is not that [positive a surprise] just that in Q4, we did a significant amount of work a little ahead of time, which I think was positive. From an overall spend and where the pressure points are, it is both in the network as well as in the IT space. And IT is largely coming because some of the digital transformation world that had started 3, 4 years ago. Either they have come to closure and as we speak for the new projects that they were about to award, they have pushed these decisions forward as we reprioritize these things. So I think that's coming in from both the network as well as from an IT transformation standpoint, if that answers your question.
Yes. And just to clarify your questions, one on incremental impact for the quarter. And then second, the margin levers for the rest of the year? How much of that is driven by growth or elsewhere? Is it?
Yes. So the second question was that most of the margin levers which are -- we are contemplating, they tend to be deflationary on growth. Is that the way we should look at it?
Yes. Okay. So first, from an incremental impact perspective for the quarter, we -- as I mentioned, we did increment most population, so the impact was closer to 1.3% in terms of margins. And there is certain size of the population, which the increment will happen in Q2. So that's a smaller impact. That's in terms of annual increments. In terms of the margin levers that I spoke about, right, if you kind of look at that, subcon substitution or improvement on scale or other productivity benefits there rarely is a lever which is kind of independent from growth perspective as you look at how we drive that. And even if you look at last 3 quarters, while growth has been stagnant or down, we've been able to drive reduction in the subcon cost dramatically. So I think that we will continue to drive. And similarly, the other areas also, which I mentioned, maybe except a little bit of view on juniorisation, which probably needs to be supplemented with growth and the recovery in the second half as we look at it. The rest can be worked on as purely productivity measures that can help us as we think about margin expansion.
The next question is from the line of Ashish Aggarwal from Sundaram Mutual Fund.
Sir, most of my questions have been answered. Just wanted to understand one thing. And as a management aptly said that this was a perfect from. But if you look at last 6 or 7 years, we have 3 or 4x where we have seen a double-digit EBITDA decline on a sequential basis on a Q-on-Q basis. Now how should we look at Tech Mahindra going forward as an investor? Given our portfolio of businesses, given our nature of business, do we see this volatility continuing over a longer term? Or do you think -- what steps we need to take to make it up, let's say, predictable or a boring organization going forward?
I like the word boring organization. I think when we last met during Investor Day in early April, right, we have said these are the 4 things that we will do. Number one, bringing an extraordinary focus on a few geographies, which included U.S. Number two, we said we will grow insurance, BFS, manufacturing and health services a little more than the other industry verticals. Number three, we said we will look at co-creation with some of our customers. We look at potential joint ventures with them to develop new service offerings or new niches. And number four, we had said we will be looking at reselling some of our service offerings as platforms.
I think we want to stay with -- on this trajectory. And obviously, there will be need -- there is a need for us to become a lot more simplified as a structure. Number two, there is a need for us to be a little more agile in terms of the way we run our own internal operations. And number three, we probably need to permanently correct our pyramid. So -- and I mean I know that Mohit is little hesitant on being prescriptive right now, but he and I have been discussing it for the last 5, 6 weeks. And in generally, the direction that we had committed to you during Investor Day, we just need to get into that formula that I think I don't remember whether it was Rohit or Manish who had said, we know what we need to do, we just now have to get in to execute, execute and execute. And I'm going to repeat that. I don't know who the original author on that Investor Day of execute, execute was. And since Manish, I'm willing to give you credit, let's get down to execute, execute, execute.
Noted, C.P. Absolutely.
The next question is from the line of [ Mihir Manohar ] from Carnelian Asset Management.
Congratulations to Mohit on joining TechM. Lastly, 2 questions. I mean first thing on the provision side. I mean pertaining to the bankruptcy. So are there any more provisions going to come? Or have you provided fully whatever was there on the balance sheet? I mean have we also considered the unbilled revenue part of it. So just wanted to get a clarity on the provision part. And my second question was just on the BFSI side of the thing. I mean when we see 40% of our business is largely coming from the CME vertical, now fundamentally, the business itself, I mean, the global telcos have been challenging over the last 4, 5 years. So what is the current BFSI business which is there it is more on the Asian Bank's side. So just wanted to get an understanding, I mean, will U.S. BFSI be an important part of our strategy? Any color around that, that will be helpful.
Yes. Sure. So maybe first on the provision side. We've covered -- on this case, we've covered all the risks that we have [indiscernible] everything. So that's been taken care of. In terms of BFSI, yes, U.S. will -- going to be a significant part of our strategy. It's a big opportunity. And as we kind of look at our portfolio from the past, where we were to where we are now BFSI is more than 15% of our overall revenue base. We've grown it from where we are to now. We are -- we've identified significant gaps both geographically as well as within the BFSI where we don't play today. So I think there's a clear articulation of that strategy internally. I think the focus will be for us to continue to drive those gaps of improvement, including a big focus in Americas as we move forward from a BFSI standpoint.
The next question is from the line of Abhishek Kumar from JM Financial.
Question to Manish. Manish, you had said that there were cost takeout deals that were in discussion and probably towards the middle of the year, those can justify. Just wanted to understand how those have moved? Are we any closer to -- closing some of those deals? And how would that change the growth trajectory in telecom, if at all, towards the latter half of this year?
Of course, Abhishek. No, I think the deals are still in play. We are still in discussions at various stages. Some of these are, as I said earlier, have been pushed out because they're evaluating all other options as well. But clearly, from a vendor consolidation, cost takeout, reformatting how the tech workforce needs to be architected, all those discussions are underway at this point, and they are all in the realm of at various levels of maturity there in the funnel at this point. And over the next 2 to 3 quarters, some of these deals will indeed impact the growth.
The next question is from the line of Dipesh Mehta from Emkay Global.
Two questions. First, just want to understand CME. If you can provide some detail on subsegment where we are seeing more weakness and how you expect that to play out over the next 3 quarters? Second question is about top 10 client performance. If you look top 10 clients, fairly resilient, whereas CME is very weak. So typically, CME used to have a higher client concentration and some of the clients were part of top 10. So if you can provide some more details about divergent trend between these 2?
Yes. So maybe I'll answer the second one first and then maybe Manish can give flavor on your first question. On the second one, for the top 10, we've been seeing -- as we articulated before, we were seeing some pressure in a couple of our top customers in the last couple of quarters. And as we have said is getting closer towards the bottom out phase. So that's happened, and we're seeing some positive momentum there. The closure of the project that we mentioned in Network Services within CME were more outside the top 10 customers, one probably further to the top 20 and the other will be below that. So I think that's what is causing a reduction there, which is leading to the decrease and then overall discretionary spend cut across the board beyond these couple of project closures which have onetime impact. which is why you don't see that in the top 10 where it stabilized -- we see more dividends there. Maybe Manish, you can take up the earlier part of the question.
Sure, sure. Yes. So Dipesh, tactically speaking, while there are different customers who are at a different point in time in terms of their transformation journey where some projects or some people are still behind the curve. Some have completed and some are in the advanced stages. And that, I think, is too detailed a question to be able to articulate in a short while. But to answer your question, most of the trends that we see in terms of the discretionary digital transformation spend as well as the cost transformation, they are pretty uniform across the major Tier 1 operators across the world.
That said, while we are very well placed with many of these companies to continue to take advantage of their initiatives, notwithstanding the fact that we probably will go through some of these headwind days and quarters. The other aspect that played out this quarter, like we said, both Rohit and I articulated was a couple of onetime cyclical issues that are part of our businesses. Hopefully, we'll be seeing all these behind us as we go forward from hereon. And to maybe provide a little bit more comprehensively to your -- as a response to your question, I want to reiterate that the 2 areas where we saw a significant push back is one is in the IT digital domain and the other was in the Network Services, where some of the reprioritizations have happened. Geographically, I think it is pretty uniform at this point. I hope this was pretty elaborate for you.
The next question is from the line of Abhishek Shindadkar from Incred Capital.
And welcome, Mr. Joshi. I have 2 questions, one for Manish and -- the first one is on last quarter, we were saying of spends related to 5G, so on and so forth. Also some of the deals got pushed off and maybe they could come in 2Q. If you can elaborate, you mentioned, we heard you about challenges, but anything specific that played out, especially related to 5G, that is what I wanted to understand. And the second question is on -- for Rohit on margins. Based on the portfolio we have today, can we assume that we have reached the bottom of the margins? And subpart to it is you mentioned that the subcontracting expenses could be less than 10% of the revenue. So is that the priority for current year or is it a priority over the next 12, 18 months?
Yes. Manish, can you take CME question first and then I will take the margins.
Yes, absolutely. No, I think I addressed the 5G question earlier in terms of the watchfulness that has gotten into the mix of decision-making. -- as far as the 5G spend is concerned, which is part of the overall digital transformation spend.
So I don't think I can add any more color to that question. But that said, the -- as we go forward, what we are seeing is that there will be a very clear focus and -- I'm sorry, let me answer the other part of your question first, which is what happened, particularly this quarter in terms of some of the decisions that got pushed out. So 1 is the enterprise part of some of the major telcos businesses. We were expecting some of these deals to come through, both in Europe as well as in the U.S.
And these decisions have been pushed out because their enterprise business is going through a lot of organizational changes as we speak. These are specific to a couple of customers, but they are significant in terms of both our portfolio as well as the impact that they have on the enterprise businesses or the industry as a whole. So these things have been pushed out as a result some of their decisions in terms of digital transformation and cost takeout have been pushed out. So that clearly was part of the surprise element that happened and how that pans out over the next few quarters remains to be seen. But we continue to remain in a dialogue with each of these customers as we go forward.
Broadly, I think I've already engaged in terms of what areas have seen slowdown in spend and what areas will continue to remain pretty important as far as spend is concerned going forward. So I just want to repeat that digital transformation is not something that they are stopping. They are just reprioritizing the various areas they want to focus on versus what they are doing today. That clarity as it emerges clearly, will lead to a lot of decisions that will start happening in the second part of the year.
And on the margin question from a subcon standpoint, I think we've obviously added for the last 3, 4 quarters, you see as a percentage of revenue, this dropped from 16% to 14%, we see that benefit in the last 3 quarters in terms of margin of subcontracting reduction. We'll continue to drive that sequentially for the next few quarters.
Sir, your voice not very audible, please can you come closer?
Yes. Is it better now?
Yes.
Yes. So on the subcon, I was saying that we've reduced that from 16% to 14% over the last 3, 4 quarters, and we'll continue to work on it as we articulated our entitlement. Mark is getting to 10% and below. And given where we are, we will continuously drive that in the next few quarters to get to that level and see that opportunity flow through from a benefit standpoint over the next 3, 4 quarters.
And Rohit, if I may just add -- sorry, just one more thing, while we have had this challenging quarter, I hope you appreciate that this is at the back of 12 quarter-on-quarter successful growth quarters that we have seen. And the reason I'm highlighting that is just to acknowledge not just the support from all of you but also from both our customers and our teams and partners who continue to put in that and believe that this business and the leadership position that we have in this industry is something that we are very confident will continue to serve as a great foundation as the industry per se transforms and comes back into a growth mode, I think your company is in a pretty good position to take advantage of it.
The next question is from the line of Kumar Rakesh from BNP.
I had just one question more on the margin side. So the kind of revenue decline, which we have seen would have started at the beginning of the quarter itself and Comviva seasonality is something which is quite well known. But we don't see any cost intervention taken during the quarter to manage the margin. So the revenue decline is largely understandable, most of the peers have also seen. But during the quarter, we had to undertook the wage hike of full impact. We went ahead hiring the sales and support staff. Our SG&A costs have also increased during the quarter. So why there was no intervention taken to manage the cost and what is giving us the confidence that now this is the bottom, and we should see a recovery from hereon because the levers that you have highlighted are largely the same which you have talked about earlier as well.
Yes, yes. So I think just from an action perspective, managing cost action did happen, just -- when you look at the revenue drop, right, the revenue drop has been -- some of it is what we planned, right, the Comviva seasonality and some of the project closures that we envisioned, but the backfill of that from new deals or discretionary spend that got reduced or more than anticipated as we move more towards the latter half of the quarter, right? So some -- some of it is well known and some of it gradually happened through the quarter. And cost actions did take place, the IT head count that's down to 1,000 quarter-over-quarter.
So it's more driven towards the later out of the quarter, and we'll continue to action as we move forward, right? So that is work in progress. In terms of sales and support headcount, as I articulated those are campus hires for the leadership program that we have, which we continue to support on those campuses to drive sustainable year-on-year program, right? And backing that off from campus culturally or what we've kind of signified doesn't make sense, right? And that's what we continue on instead of backing away from that, right? So that's what the increase you see is not adding the sales headcount etc. right, given the declining [indiscernible].
The next question is from the line of Sameer from ICICI Prudential AMC.
Yes. So if you think about an environment which we are currently in right now, the ability to monetize some of your levers like last 2, 3 quarters, you have been able to bring down subcon from 16% to 14%, now you're headed to 10%. So how should we think about the pace of monetizing these levers, especially in an environment where we are facing a lot of headwinds in terms of discretionary cut. That is one point. And how does that change our margin goal that you have set up in the Analyst Day that you have spoken about? That is the first question. The second is that in an environment like this, where a lot of these short-term projects are getting rolled off and there's a lot of discretionary cut, our last 6 months TCV generally decides the revenue trajectory, which has been weaker for us. So what gives you confidence, the growth may come back or this is kind of the bottom in terms of performance?
So Sameer, let me answer this with 2 broader strokes. One is what I have told my team is if we can't go for the sixers, go for singles. Effectively, what it means is that, sometimes, when you go back to the basics, with all your accounts and you are better prepared to listen to them for those smaller transformative [Gen-I] kind of deals, I mean it's also all of that adds up. That's number one. Number two, for the cost transformation, I think, I mean, I would rather take a medium-term outlook then very short-term outlook. Short-term outlook is very simple. Cut a few layers, and you can right size it almost on an urgency. But if I -- which is what I want to propose to Mohit and Rohit both, Mohit Joshi and Rohit Anand, is that if we take a medium-term outlook, what will happen is that, a, as I said, I would go more aggressive on investing in the young talent. That means we invested last year in Tier 2 cities, why not take a target of 25,000 people in the Tier 2 cities in the young talent.
Now that 25,000 people will become productive in the next maybe 6 to 8 months. I'm just giving a suggestion. I'm not saying we've taken a decision here. But I'm just wanting to re-amplify the word medium term. And as far as my existing staff, if I reskill them fast enough and if I focus on the short-term projects, I think I'll be able to optimize it both the market demand as well as the needs of my employees and for a medium term, I have no choice but to correct the pyramid. And for that, I have to take one shot at investing so that we permanently correct the pyramid. Otherwise, we have a challenge in our CME costs compared to others in the industry. And the only reason we have the CME challenge is 3 factors: onsite/offshore ratios; number two, subcons; and number three, juniorisation.
Ladies and gentlemen, that would be our last question for today. I now hand the conference back to the management for the closing comments.
So thank you, everybody. As I said, -- we all know that we have faced one of our toughest quarters. But overall, I want to reemphasize, Tech Mahindra is positive about its own outlook. We, as a team, have gone through some of these challenges in the past, and we will rally together. And as committed by many of my management team members here today, we will start improving our performance as we go along. And the magic word is the same 3 words that I started the call with execute, execute, execute. Thank you, everybody. Thank you for your support, and I need more support as the team repurposes and gets into the recovery phase. Thank you.
Thank you, very much. Ladies and gentlemen, on behalf of Tech Mahindra Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.